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McKay looks cheap

RESULTS: The regional office market is stagnant, but McKay has had a strong half and its shares look cheap
November 20, 2012

Real-estate investment trust McKay Securities (MCKS) signed two big deals during the six months to the end of September. The first was a 12-year lease to the Overseas Development Institute for its newly furbished office block on Blackfriars Road in Southwark, at a rent of £800,000 a year. Partly because this was 9 per cent above surveyors' March estimates of rental value, the building was marked up in value by a full 48.1 per cent. That was the primary driver behind the 1 per cent growth in the value of the total portfolio.

IC TIP: Buy at 137p

The other deal was a potentially profitable acquisition in Farnborough. McKay bought Pinehurst Park, which consists of two office buildings let to IBM, for under three times the rental income of £1.29m. The income will fall to £500,000 when IBM vacates one of the buildings next year, but McKay then hopes to get planning permission to convert the site, which used to be a convent, into housing and sell it to a specialist developer. When IBM leaves the remaining 1980s office block in 2018, it will then sell on the rest of the plot for housing.

These two deals helped boost rental income by 5.2 per cent to £7.23m. After flat administration costs and slightly lower interest payments, adjusted profit was £2.94m - 17.6 per cent higher than last year.

House broker Oriel Securities expects adjusted full-year net asset value to increase to 233p a share (229p in 2012).

MCKAY SECURITIES (MCKS)

ORD PRICE:137pMARKET VALUE:£63m
TOUCH:134-137p12-MONTH HIGH:144pLOW: 109p
DIVIDEND YIELD:6.1%TRADING PROPERTIES:nil
DISCOUNT TO NAV:9%
INVESTMENT PROPERTIES:£222mNET DEBT:152%

Half-year to 30 SepNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2011161-14.0-30.52.70
2012150-2.70-5.892.70
% change-7---

Ex-div: 28 Nov

Payment: 10 Jan