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Unite graduates at last

RESULTS: The student landlord doubles its profits thanks to rigorous cost control against a strong market.
August 30, 2012

Unite Group's shares bounced 12 per cent on a near-flawless set of interim results, taking the two-month gain to almost 40 per cent. The market finally seems to be recognising a story we have been telling for more than a year now - that the student landlord has significant recovery potential in a strong market niche.

IC TIP: Buy at 249p

Most impressive was the company's profitability, which has long been constrained by a bloated cost base, a lossmaking manufacturing unit, expensive debt packages and a focus on development rather than lettings. Having achieved progress on all these points, rental income rose by 16 per cent to £56.7m, while costs were flat. The net result was that recurring profits from operations doubled to £14.4m, with pre-tax profits and dividends following suit.

Such a strong performance is not entirely repeatable. Unite made £1m-£1.5m from the Olympics by leasing rooms out to Locog for transport workers and those staff G4S did manage to recruit. The winter was also much warmer than last year, reducing utility bills. Still, two-thirds of the margin improvement should be permanent, according to finance director Joe Lister. And Unite's market - student lets - remains very strong. Like-for-like rental growth over the six-month period was 1.8 per cent, up from 1.5 per cent in the first half of last year, suggesting the company's annual target of 3-4 per cent growth is easily achievable.

That's important not just because it underpins growth in rental income and profits, but also because it drives up the value of the properties. Valuation surpluses were £20m over the period, which added 12p per share to net asset value (NAV). Overall, adjusted NAV (which differs from the basic figures below because it marks trading properties to their market value and strips out writedowns on interest-rate swaps) increased 5.3 per cent to 335p since the December year-end.

Unite became the first beneficiary of Legal & General's new property-lending division in May with a £121m 10-year loan at 5.05 per cent. That reduced average cost of debt from 5.7 to 5.5 per cent, although loan interest costs increased slightly due to higher debt levels.

Pending upgrades, broker Espirito Santo forecasts year-end adjusted NAV of 339p.

UNITE GROUP (UTG)

ORD PRICE:249pMARKET VALUE:£399m
TOUCH:249-250p12M HIGH / LOW250p150p
DIVIDEND YIELD:0.9%TRADING PROP:£359m
DISCOUNT TO NAV:5%
INVESTMENT PROP:£640m*NET DEBT:115%

Half-year to 30 JunNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201125216.39.50.5
201226233.520.21.0
% change+4+106+113+100

Ex-div: 10 Oct

Payment: 09 Nov

*Including £181.5m of joint ventures