Songbird owns the iconic office estate at Canary Wharf, but its shares trade 42 per cent below their underlying book value. That, in simplistic terms, is why investors should buy the company's shares.
- High-quality property
- Huge discount to NAV
- Top-rate tenants
- Technical stars aligned
- Major external shareholders
- Excessive debt
There are good reasons why investors have shunned Songbird. Foremost is the messy legacy of a messy history. The Canary Wharf project has faced bankruptcy three times since it was begun in the late 1980s and three times it has been bailed out by huge investors eager to own a slice of Europe's premier banking district. Besides a reputation for risk, the company has emerged with a confused capital structure.
Briefly, Songbird is the Aim-quoted vehicle through which Morgan Stanley and the Glick family rescued Canary Wharf Group, the estate's developer, in 2004. They remain major shareholders, with a third of Songbird between them. But they were joined in 2009, the latest property crash, by Chinese and Qatari sovereign wealth funds, which now own 43 per cent of Songbird's shares as well as a panoply of preference shares and warrants.
Public shareholders, who own the remaining 24 per cent of Songbird, are easily forgotten in the melee. For example, until a renegotiation of some terms in August, the company was barred from paying dividends on the ordinary shares without the consent of the preference shareholders in China and Qatar.
To make matters more complex, Songbird only owns 69 per cent of Canary Wharf Group. The minority shareholders are, however, reassuringly reputable - Brookfield, a Canadian office company that has been rapidly expanding in the City, and US value investor Franklin Templeton.
The other problem with Songbird and Canary Wharf Group is their combined debt, which, net of cash, totalled £3.27bn in June - 65 per cent of the value of the Canary Wharf estate. Such a high loan-to-value ratio amplifies movements in the value of the underlying assets and erodes profits (the 6.2 per cent cost of debt is higher than the portfolio's rental yield at 5.1 per cent). On the plus side, the average loan maturity is 13.4 years, so there are no refinancing headaches around the corner.
SONGBIRD ESTATES (SBD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 116p | MARKET VALUE: | £887m | |
| TOUCH: | 115-116p | 12M HIGH / LOW: | 122p | 100p |
| DIVIDEND YIELD: | nil | DEVELOPMENT PROP: | £563m | |
| DISCOUNT TO NAV: | 42% | |||
| INVESTMENT PROP: | £4.54bn | NET DEBT: | 189% | |
| Year to 31 Dec | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 63 | -1,900 | -972.7 | nil |
| 2009 | 168 | 335 | 57.7 | nil |
| 2010 | 187 | 464 | 41.3 | nil |
| 2011 | 190 | -213 | -9.0 | nil |
| 2012* | 199 | 15 | 1.5 | nil |
| % change | +5 | – | – | – |
Normal market size: 2,000 Matched bargain trading Beta: 0.5 *Peel Hunt estimates (profit and earnings not comparable to prior years) | ||||
So what's to like about Songbird? Most of all, the property. Canary Wharf Group owns top-quality offices let on long leases to tenants too big to fail. Moreover, the original business rationale for the venture - offices in the City are expensive and often impossible to build on the scale some companies require - is as relevant now as it was in the 1980s. When Crossrail arrives in 2018, Canary Wharf will be even more accessible.
If the estate's long-term potential is substantial, it is unlikely to receive much of a valuation boost in the short term. London office values outside the ever-buoyant West End have been stagnant for about 18 months. That said, values are unlikely to be marked down. Meanwhile, the retail component of the estate is thriving, with valuations up 4.3 per cent in the first half.
