EU referendum fears have been weighing on the property sector over recent months, and shares in St Modwen Properties (SMP) have also been hit by the market's concerns about top-end London residential developments. However, the group's exposure to this frothy part of the market is limited and its net asset value (NAV) continues to climb, facts that seem incongruous with the shares' 37 per cent discount to forecast November 2016 NAV and 32 per cent discount to last year's NAV.
- Shares at big discount to net asset value
- Solid gains in rental income
- Significant value in 6,000 acre land bank
- Limited exposure to London housing market
- Modest dividend
- Uncertainty ahead of EU referendum
While some negative sentiment about falling prices of top-end London flats is understandable, St Modwen's exposure to this part of the market is limited to the New Covent Garden Market site at Nine Elms. Having squeezed the actual market into a smaller space, there is plenty of land ripe for redevelopment. Vacant possession is not expected until early next year, when the group can decide whether to sell its stake in the joint venture, or to develop it out.
But the key point here is that while Nine Elms is the largest of St Modwen's 84 developments by value, it nevertheless accounts for just 13 per cent of the portfolio. What's more, the company seems relatively sanguine about the outlook, commenting in its 23 March trading update on the market's dour sentiment towards Nine Elms: "Having reviewed sales activity in the area it is clear that current market evidence does not support this level of negativity." What's more, broker Numis calculates that even valuing Nine Elms at zero would leave the shares trading at a 20 per cent discount to NAV.
There doesn't seem to be anything else in St Modwen's portfolio to spook investors. The 468-acre former Longbridge site in Birmingham entered its second development phase last November. Elsewhere, the Bay Campus developed for Swansea University opened for students in September last year, and phase two was completed in January this year. Phase three will be completed in September next year. The group also completed the redevelopment of its site in Wembley Central, comprising an 86-bedroom Travelodge and 120,000 sq ft of retail and leisure space already leased to major retailers including Tesco, Sports Direct and Argos.
| ST MODWEN PROPERTIES (SMP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 304p | MARKET VALUE: | £675m | |
| TOUCH: | 303-304p | 12M HIGH: | 499p | LOW: 285p |
| FWD DIVIDEND YIELD: | 2.3% | DEVELOPMENT PROPERTIES: | £184m | |
| DISCOUNT TO FORWARD NAV: | 41% | |||
| INVESTMENT PROP: | £1.1bn | NET DEBT: | 54% | |
| Year to 30 Nov | Net asset value (p)* | Pre-tax profit (£m)* | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 298 | 82 | 33.5 | 3.99 |
| 2014 | 342 | 135 | 53.8 | 4.59 |
| 2015 | 446 | 258 | 97.9 | 5.74 |
| 2016* | 481 | 104 | 40.5 | 6.31 |
| 2017* | 519 | 104 | 40.4 | 6.95 |
| % change | +8 | - | - | +10 |
Normal market size: 2,000 Matched bargain trading Beta:0.63 *Numis estimates, adjusted NAV and PTP figures | ||||
Development progress will help to boost rental income, which increased by 29 per cent to £58.4m in the year to November 2015, with further gains coming this year. This will be the key driver in overall growth, taking the place of property revaluation gains, which are set to moderate. Indeed, much of the forecast drop in headline profits reflects the fact that last year's numbers were boosted for the first time by the inclusion of the Nine Elms site, which lifted net asset value by a net £127.4m.
Added to all of this is the residential division, which generates profits through land sales, St Modwen Homes and a joint venture with Persimmon (PSN). Sales of land ready for development last year included a 6.9 acre site in Mill Hill sold to Taylor Wimpey (TW.) for £43m and a 17-acre site in Worcestershire to Barratt Homes (BDEV). On top of this, St Modwen Homes secured 315 housing completions as well as a further 652 for the Persimmon joint venture.
