As one of the fathers of the efficient market hypothesis, recent Nobel Prize winner Eugene Fama explained why it's so hard to beat the market - everything is in the price. Yet he also identified a very few exceptions: small stocks outperform larger ones, while stocks that trade at a discount to book value also tend to outperform. LXB Retail (LXB) fits both descriptions neatly.
- Big discount to forecast NAV
- Forecasts underpinned by recent disposals
- Continuation vote in late 2014
- Planning problems
- Supermarket 'space race' has abated
The Aim-traded supermarket developer currently trades for 116p a share. Assuming its current plans come to fruition, however, its book value should be around 165p a share by next September when a continuation vote is scheduled to give shareholders the option of winding up the company to realise any value not already reflected in the share price. This represents a prospective discount of about 30 per cent. To put it another way, shareholders stand to make a 42 per cent gain if the shares re-rate to forecast book value.
So, with the continuation vote on the cards, why wouldn't they? For one thing, the company still needs to do some development work to realise the full 165p being pencilled in by house broker Oriel Securities. LXB's net asset value (NAV) in March was only 117p. Since then it has made four sales, crystallising profits of £41m - of which £22m or 10p a share has yet to be recognised in the books, according to Oriel. But that leaves a further 38p of value yet to be realised.
This should come from the company's five remaining retail projects, which are in Banbury, Biggleswade, Rushden, Stafford and Sutton. Management has said it will realise "almost all of the value on these investments" by September 2014. But this is subject to risk, above all in the planning and pre-letting stages.
LXB RETAIL PROPERTIES (LXB) | ||||
|---|---|---|---|---|
| ORD PRICE: | 116p | MARKET VALUE: | £251m | |
| TOUCH: | 113-115p | 12-MONTHHIGH: | 123p | LOW: 105p |
| DIVIDEND YIELD: | nil | TRADING PROPERTIES: | nil | |
| DISCOUNT TO NAV: | 30% | |||
| INVESTMENT PROPERTIES: | £241m | NET DEBT: | 1% | |
| Year to 30 Sep | Net asset value** (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 95 | -1.7 | -1.4 | nil |
| 2011 | 108 | 19.2 | 10.3 | nil |
| 2012 | 112 | 9.7 | 3.7 | nil |
| 2013* | 131 | 30.0 | 14.0 | nil |
| 2014* | 165 | 98.1 | 45.6 | nil |
| % change | 26% | 227% | 221% | - |
Normal market size: 2,000 Matched bargain trading Beta: 0.3 *Oriel estimates, underlying NAV, EPS and PTP figures | ||||
LXB has planning permission for all five projects except Sutton, where an application was submitted in June for approval (or rejection) next month. However, two projects have fallen foul of local activism. Banbury is subject to a 'judicial review' challenge and last December Rushden was 'called in' by the Secretary of State. A final decision is expected by Christmas.
The Rushden call-in has prevented the company signing pre-let agreements, but elsewhere projects have commitments from retailers covering between a third and 85 per cent of the available retail space. The tenants are the kind of household names that attract risk-averse institutional property buyers: Marks & Spencer, Next and Matalan at Biggleswade, M&S and Next at Banbury, Morrisons at Stafford and Sainsbury's at Sutton. The company's three schemes at Greenwich, London, which it sold at prime valuations to Aberdeen Asset Management this summer, boasted a similar tenant line up.
NAV forecasts assume the company will jump the planning hurdles and let most of the remaining space over the coming 12 months, which represents a significant uncertainty, but encouragement can be take from Greenwich.
