In the real estate game, property development is where the real growth is to be found. And with three broker forecast upgrades over the past six months, coupled with industry-leading net asset value (NAV) growth forecasts, developer St Modwen Properties (SMP) looks as though it will be entering a real sweet spot in 2015. Plenty of hidden value exists in the land bank of this well-diversified business, which builds houses and operates a rental portfolio as well as developing commercial property, and the group stand to benefit from the spread of the property recovery into the regions. What's more, based on the historic valuation range, there is plenty of re-rating potential left in the shares, which trade at a discount to forecast book value.
- Shares at a discount to forecast book value
- Strong development pipeline
- Diversified revenue stream
- Significant realisations expected in 2015
- Modest dividend payout
- Relatively high gearing
It could be argued that management continues to err on the side of caution when assessing the potential of this pipeline, but the fact remains that there have been three profits upgrades in the past six months alone. In the latest upbeat statement, which covered the financial year to November, the key uplift came from news that it has secured outline planning consent to redevelop the New Covent Garden Market site in Nine Elms. It now expects to complete all the additional bits and pieces that are required under the Section 106 agreement, and secure unconditional planning consent in the first half of 2015, which should drive a significant NAV upswing.
This is a significant milestone, because in squeezing the existing market into a smaller space, St Modwen hopes to free up an additional 20 acres of land to accommodate 3,000 new homes, 135,000 sq ft of office space and 100,000 sq ft of retail and leisure space. As a work in progress, the potential value of this is not recognised on the balance sheet.
Outside London, St Modwen has been careful to look at sites where there are tangible signs of a regional recovery. One such site is the 468-acre former Longbridge site in Birmingham. Nearly all of the retail space in the first phase is either occupied or let, and included in the second phase is a 150,000 sq ft Marks and Spencer store and a further 45,000 sq ft of additional retail space and car parking.
It's also well on the way to completing the £450m Bay Campus development at Swansea University. This is expected to be ready by September 2015, and will provide over three-quarters of a million sq ft of educational buildings and 917 student apartments. A further deal was secured in June to deliver an additional £50m of new student residences and further educational facilities. All in all, the development will cover around 1m sq ft, including 1,462 student apartments.
| ST MODWEN PROPERTIES (SMP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 394p | MARKET VALUE: | £872m | |
| TOUCH: | 393-394p | 12-MONTH HIGH: | 426p | LOW: 328p |
| FORWARD DIVIDEND YIELD: | 1.3% | TRADING STOCK: | £202m | |
| DISCOUNT TO FORWARD NAV: | 9% | |||
| INVESTMENT PROP: | £941m | NET DEBT: | 55% | |
| Year to 30 Nov | Net asset value (p)* | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 232 | 52 | 21.7 | 3.3 |
| 2012 | 272 | 53 | 21.3 | 3.6 |
| 2013 | 298 | 82 | 33.5 | 4.0 |
| 2014* | 343 | 132 | 48.5 | 4.6 |
| 2015* | 428 | 235 | 85.7 | 5.3 |
| % change | +25 | +77 | +77 | +15 |
Normal market size: 2,000 Matched bargain trading Beta: 0.98 *Numis estimates, adjusted NAV figures | ||||
On the housebuilding side, St Modwen Homes and a joint venture with Persimmon (PSN) sold 617 units up to October, while £80m of land sales have been made to hungry builders, all at above book value. And there is likely to be plenty more where this came from because St Modwen is sitting on a land bank of around 6,000 acres. The company also generates a useful revenue stream from its rental portfolio, which, crucially, is more than enough to cover administrative expenses.
Group finances have also been beefed up with a move to diversify the funding base and extend maturity dates. At the end of May the average cost of debt had been reduced from 5.6 per cent to 5.1 per cent, and the average maturity rose from 2.5 years to 4.2 years. On top of this, the group has nearly £200m of undrawn facilities in place to fund further developments.
