Quintain Estates & Development's (QED) new management team has sold assets to slash debt and focus activities on a massive and increasingly promising residential regeneration project in Wembley. However, trading at a discount to NAV, the shares are yet to rerate to reflect the progress and look very cheap compared with other residential plays. With circumstances having changed in a fairly dramatic fashion for Quintain, we don't think the discount rating is likely to remain for much longer.
- Discount to net asset value
- Strong development pipeline
- Steady reduction in debt
- Strong earnings visibility
- No dividend
- Modest rental income
The start of Quintain's recent renaissance was a wholesale boardroom change, with the arrival of a new chief executive, finance director and executive director. Their first priority was to breathe life into an asthmatic balance sheet burdened with debt. This was achieved when Knight Dragon, its joint venture partner in a vast Greenwich peninsular development project, bought out Quintain's minority stake for £230m, which almost halved net debt overnight.
This left Quintain principally focused on an 87-acre mixed-use development site around the Wembley arena in north west London. The project represents nearly two-thirds of the property portfolio by value. For five years the valuation of the Wembley development was slipping, but recently the values have flat-lined and are widely expected to now start to rise. Residential prices in and around Wembley are being pushed up by growing investor demand for sites situated within reasonable distance of central London.
| QUINTAIN ESTATES & DEVELOPMENT (QED) | ||||
|---|---|---|---|---|
| ORD PRICE: | 100p | MARKET VALUE: | £522m | |
| TOUCH: | 99.5-100p | 12-MONTH HIGH: | 108p | LOW: 68p |
| FWD DIVIDEND YIELD: | nil | TRADING PROPERTIES | £9.6m | |
| DISCOUNT TO FWD NAV: | 19% | NET DEBT: | 30%* | |
| INVESTMENT PROPERTIES: | £762m | |||
| Year to 31 Mar | Net asset value (p) | Net Operating Income (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 115 | 42.7 | 1.2 | nil |
| 2012 | 110 | 41.7 | 0.3 | nil |
| 2013 | 104 | 39.7 | 1.8 | nil |
| 2014* | 116 | 42.8 | 1.8** | nil |
| 2015* | 124 | 42.1 | 1.8** | nil |
| % change | +7 | -2 | - | - |
Normal market size: 7,500 Matched bargain trading Beta: 0.51 *Pro froma figure reflecting Greenwich sale **Peel Hunt estimates, adjusted EPS figures | ||||
The first stage of the Wembley development has already been rolled out, with the construction of 475 flats aimed specifically at a price point that is affordable to Londoners looking for a new home to buy or rent. Almost certainly, such a pitch has helped to ease the cogs in gaining planning consent from the local authority, and sets the path for further development. In fact, Quintain now has outline consent to develop 5,000 homes, which together with other mixed-use developments could take around 12 years to build out, providing significant earnings visibility. Quintain's plan is to keep gearing down by financing development work with a joint-venture partner, while introducing a recurring revenue stream, which on private rented sector units works out at 6.6 per cent gross yield.
Where the houses built are sold outright, land valuation plays a crucial part. Quintain is focusing on mid and upper residential sales of between £450 and £1,000 per square foot. Analysts at Peel Hunt are looking for an average of £490 per sq ft. for the 475 flats currently being developed, but point out that every extra £50 achieved equates to an extra 20p on net asset value. Other developments include £14m spent on a short leasehold building above Holborn Tube station, with a running yield of 10 per cent providing a useful income stream. It has also bought a 10-story building close to Bank tube station for £40m, providing rental income of £2.5m, and representing a yield of 6.1 per cent.
