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Valuation boost for Grainger

Rising house prices and rental growth underpin Grainger's growth
November 21, 2014

Despite signs that the UK housing market is now cooling, residential landlord Grainger (GRI) delivered another forecast-busting set of annual results. A 15 per cent uplift in property values lifted gross book value - which marks trading assets to market and strips out liabilities for deferred tax and the fair value of interest rate swaps - by 20 per cent to 291p. By way of comparison, a combination of the Nationwide and Halifax house price indices rose 9.5 per cent.

IC TIP: Buy at 196p

And this book value figure does not factor in Grainger's reversionary surplus - the uplift from the market value of its properties to the vacant possession value, which will be realised gradually as the company's tenants pass away. Management reckons this surplus is now £503m or 120p a share.

Gross rental income fell from £71m to just over £57m, which was much as expected given the number of properties sold or transferred into co-investment ventures. But like-for-like rents on the rented properties Grainger manages in the UK rose by an average of 9 per cent on new lets, and 4 per cent on renewals.

Strong cash generation helped pay for £182m of property purchases, excluding development. Up from just £9m the previous year, this figure shows that Grainger has swung back into growth mode after years of deleveraging. By far the largest purchase was a portfolio of 61 freehold houses in Chelsea and Knightsbridge for £160m.

Net debt ticked up above the £1bn mark, but rising property values meant that the loan-to-value ratio still fell from 48 to 46.5 per cent. Chief executive Andrew Cunningham pointed out that this remains comfortably within the group’s 45-50 per cent target range. Last year’s 5.9 per cent average cost of debt was also reduced to 5.4 per cent, as more expensive earlier loans expired.

Analysts at Numis Securities are forecasting adjusted (triple net) book value of 258p by September 2015.

GRAINGER (GRI)
ORD PRICE:196pMARKET VALUE:£816m
TOUCH:196-197p12-MONTH HIGH:250pLOW: 168p
DIVIDEND YIELD:1.3%TRADING PROPERTIES:£1bn
DISCOUNT TO NAV:19% 
INVESTMENT PROP:£333mNET DEBT:194%

Year to 30 SepNet asset value (p*)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2010140-20.8-2.91.7
201115326.19.51.8
2012157-1.70.11.92
201319564.313.12.04
201424281.118.12.5
% change+24+26+38+23

Ex-div: 29 Dec

Payment: 6 Feb

*Trading properties marked to market value (triple net NAV)