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Grainger's new business model

Grainger is selling off non-core assets and is developing its rental income stream
December 5, 2016

Grainger (GRI) has undergone a near metamorphosis in the past year, selling non-core assets and reshaping itself as a leading operator in the private rented sector. Acquisitions totalling £389m of an £850m investment programme have already been secured, and acquiring new tenanted rental homes lifted net rental income by 15 per cent to £37.4m. Shareholders were rewarded with a near-two-thirds jump in the dividend payout for the year to September, and Grainger is working towards paying the equivalent of half net rental income as dividends. Analysts at Peel Hunt estimate that in the coming years this could push the dividend yield towards 5 per cent, although obviously this is a function of the share price.

IC TIP: Buy at 220.3p

Previously heavily reliant on house price inflation as the driver of capital value, the new business model is more investment-centred with a sustainable revenue stream from private rented homes. This model will be funded by further disposals as more of its regulated tenancy portfolio falls vacant. And there is significant reversionary value to be crystallised here, estimated at £258m on regulated tenancies alone.

Disposals, including the equity release business and its German operation, allowed Grainger to reduce its debt mountain by £374m to £764m. And together with a £100m refinancing after the year-end, the cost of debt has been cut from 5.3 per cent to 3.7 per cent - that's below the target rate. The most immediate benefit was a 28 per cent reduction in finance costs to £39.2m.

Acquisitions are likely to be in areas where demand for rented accommodation is the highest, including London, Manchester, Bristol, Birmingham and Leeds. Estimates suggest that an additional 1.8m rental homes will be needed by 2025 in the UK to meet demand. As well as investing £850m in private rental assets, Grainger is planning to increase the proportion of private rented assets in its portfolio to half, from 27 per cent at the moment - while net rental income is targeted to exceed profits from sales (currently equivalent to 52 per cent of asset sales), while putting less reliance on disposal gains to cover costs. Income covered 74 per cent of costs in the past year, up from 53 per cent a year earlier.

Analysts at Peel Hunt are forecasting adjusted net asset value of 286p at the September 2017 year-end (from 285p in 2016).

 

GRAINGER (GRI)

ORD PRICE:220.3pMARKET VALUE:£918m
TOUCH:220.2-220.8p12-MONTH HIGH:249pLOW: 193p
DIVIDEND YIELD:2.0%TRADING PROPERTIES:£904m**
DISCOUNT TO NAV:23% 
INVESTMENT PROP:£445m*NET DEBT:113%

Year to 30 SepNet asset value** (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2012157-1.70.11.92
201319564.313.12.04
201424281.118.12.50
201526351.410.72.75
201628784.218.04.50
% change+9+64+68+64

Ex-div: 29 Dec

Payment: 10 Feb

*Includes investments held in associates and joint ventures **Trading properties marked to market value (triple NAV)