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Take profits on Mucklow

Industrial landlord Mucklow is an excellent operator, but its shares are seriously overpriced
November 1, 2012

If you're a shareholder in A&J Mucklow (MKLW), it's time to take profits. The Midlands-based industrial landlord is a fine operator, but the level to which its shares have soared is hard to justify.

IC TIP: Sell at 355p
Tip style
Sell
Risk rating
High
Timescale
Long Term
Bull points
  • Excellent track record
  • No debt problems
Bear points
  • Big premium to book value
  • No organic rental growth
  • Falling property valuations

Investors can sell the shares at 355p each - a fifth higher than their adjusted net asset value (NAV) of 297p at the end of June. That premium might be understandable if NAV were rapidly increasing, so that the share price was anticipating the future value. But Mucklow's book value is falling, dragged down by a weak regional property market. The company's adjusted NAV of 318p in June 2011 turned out to be a mini-peak; since then industrial property values have fallen, sometimes sharply. Mucklow's portfolio was marked down by 5.6 per cent or £15.1m over the most recent financial year, wiping out its rental income.

Chairman Rupert Mucklow blames this decline on surveyors' estimates backed by few transactions. Meanwhile, Mucklow is financially secure - with a loan-to-value ratio of just 27 per cent - so it won't need to realise paper losses.

But just because deals are rare does not render their values invalid. Besides, Mucklow's 5.6 per cent fall in capital values over the year looks too steep to ignore. According to index provider IPD, industrial capital values outside England's south east fell by an average of 3.6 per cent during the year to 30 June. IPD does not have a separate index for Birmingham, where Mucklow operates, but the weakest figure it clocked was a 5.4 per cent fall in Manchester.

MUCKLOW (MKLW)

ORD PRICE:355pMARKET VALUE:£213m
TOUCH:355-357p12-MONTH HIGH:403pLOW: 280p
DIVIDEND YIELD:5.5%TRADING PROPERTIES:£0.45m
PREMIUM TO NAV:18%
INVESTMENT PROPERTIES:£252mNET DEBT:39%

Year to 30 JunNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2009266-52.0-86.717.7
201031036.060.918.0
201131412.922.418.5
20122950.10.319.1
2013*30013.422.319.6
% change+3%

Normal market size: 800

Matched bargain trading

Beta: 0.3

*Arden Partners estimates (only dividends are adjusted figures not comparable with prior years

Perhaps the Birmingham market is particularly weak, or perhaps Mucklow's portfolio is of patchier quality than the index. Either way, such figures are hard to reconcile with the 22 per cent year-to-date rise in Mucklow's share price. Nor is there any sign that investors' appetite towards regional property is improving. Banks continue to reduce their exposure to property - by £2bn in the third quarter alone, according to the Bank of England - and the equity-rich prefer London.

Because it is little affected by the banking cycle, the market for rented space tends to be less volatile than the market for properties. The Midlands industrial sector is no exception, and Mucklow's vacancy rate of 6.5 per cent is at its lowest for five years. But its rents have nonetheless been falling, from an average of £5.10 per sq ft last June to £4.95 per sq ft this year. With purchasing managers' surveys suggesting UK production is contracting, flat rents are the best that can be hoped for in the current financial year.

So why are Mucklow's shares trading at such a premium? The main reason is the company's outstanding record. It has not cut its dividend since flotation in 1962, and emerged from the latest financial crisis with its balance sheet unscathed. Its strength was not so much thanks to foresight ("We do not anticipate any significant correction in the value of our modern investment portfolio," wrote Mr Mucklow in September 2007) as to a highly conservative approach to debt - in September 2007 its net debt was just 7 per cent of shareholders' funds.

That meant it did not need to raise capital or sell assets at the bottom, as the big real-estate investment trusts did. Instead Mr Mucklow used the crash to buy property and increase the rent roll. Even as market rental levels fell during the year to 30 June, Mucklow's rent roll increased by 10 per cent, allowing it to up the dividend.