A key take for me were the relatively upbeat comments from chairman Sir Michael Heller and chief executive John Heller who noted that “we are starting to feel that portfolio is moving upwards and are optimistic that shareholders will enjoy the benefits of this over the coming years”.
They have a point as the company’s largest directly owned asset, Orchard Square in Sheffield, is in effect fully let, having secured several major lettings. These include a 15-year lease to Virgin Money on a double unit at a combined annual rent of £345,000, and a unit leased to Costa Coffee at £75,000 a year. The same is true of Brixton Village in south west London where there is now a long list of retailers waiting for a unit to become available. Even the Kings Square shopping centre in West Bromwich, which has had its challenges after a new shopping centre opened in the town and poached some of Kings Square’s tenants by offering incentives the company was unwilling to match, is now bagging some large lettings. These include discount fashion retailer Pep & Co, discount store Your Only Choice, Virgin Media and Card Factory. The spate of lettings activity means that voids on the portfolio overall have narrowed from almost 6 per cent to 2 per cent.
Furthermore, the company is making headway at its shopping centre joint ventures with Oak Capital Management. The Rushes in Loughborough is now fully let and will be sold later this year; the Kingsgate Centre in Dunfermline is close to being fully let and should generate rental growth in the future; and the same is true of a shopping centre in Kings Lynn where the company is working with the freeholder, Kings Lynn Council, on a number of asset management initiatives to add “significant value” to the asset.
The bottom line
Of course, it hasn’t all been plain sailing which is why the company’s net asset value declined from 49.5p a share reported at the June 2015 half year end to 47.3p at the end of 2015. However, the major point being that with voids now markedly reduced, interest charges significantly lower following a refinancing of debt, and cash being generated from disposals including the recent sale of the Langney Shopping centre in Eastbourne, then the company is on a much sounder footing even if revaluation gains proved elusive to come by last year.
Admittedly, a 41.5 per cent stake in South African coal miner Bisichi Mining (BISI: 76p) which is consolidated into London & Associated’s accounts clouds the picture. That said, I am far less interested in Bisichi as London & Associated’s shareholding in the company has an open market value of only £3m, a tiny amount in comparison with the value London & Associated has tied up in its directly owned retail property assets which are worth in excess of £93.5m. In any case, Bisichi also owns a retail property portfolio worth £13m that’s actively managed by London & Associated and generates annual rental income of £1m. In effect, I view Bisichi as a property company with a coal miner attached and one that pays London & Associated a useful cash dividend of £177,000 a year.
Ultimately whether you decide to invest in London & Associated will depend on whether you believe that the company has turned the corner. If it has then a share price discount of 44 per cent to net asset value is incredibly harsh even after factoring in a small cap liquidity discount. And that is why I feel that the shares should offer further upside. Buy.
