St Modwen steps up a gear

Strong demand for residential and commercial projects has worked well for regeneration specialist St. Modwen Properties (SMP). Indeed, a trading statement last month indicated that profits for the year to end-November will be substantially ahead of previous expectations.

A positive trend in valuations has been supported by a number of significant transactions, notably a 45-year lease on a 150,000 sq ft Marks and Spencer store at Longbridge - one of the largest in the UK for the retailer. The new store will also be an anchor for the second phase of the new Longbridge town centre. With this project, St Modwen is also submitting a revised planning application, including proposals for an additional 45,000 sq ft of retail units and two car parks.

Meanwhile, Key Property Investments (KPI), which is a joint venture with Salhia Real Estate, has sold the 327,000 sq ft Elephant & Castle retail and office complex for £80m. That's significantly ahead of the current book value and the proceeds will be used to reduce KPI's debt. Other commercial portfolio plans this year include securing planning consent for the new Covent Garden market site, while progress is continuing with new student accommodation at Swansea University and with a mixed-use project at St Andrew's Park, RAF Uxbridge.

Numis Securities says…

Add. Stronger than expected profits will come from the Elephant & Castle disposal having been materially above book value and from a more favourable valuation backdrop, notably in the residential market. We believe the outlook for valuations is increasingly positive, with potential yield compression in the income producing portfolio. As a result, we have increased our net asset value (NAV) estimate to 318p for 2014 and 401p for 2015. We have also increased our pre-tax forecast by 50 per cent to £88.9m for 2014 and £222m for 2015. If asset price inflation accelerates from here, St Modwen's shares have the potential to trade at a premium to 2015's forecast net assets.

J.P.Morgan Cazenove says…

Overweight. Signs of improving occupational demand, together with a growing sense of optimism in commercial development, leave us expecting to see 8 per cent NAV growth in the year to end-November 2013 to 294p. That's before the £9m net profit from the Elephant & Castle sale. While, on the residential side, demand for land is growing steadily and higher occupation levels indicate that properties are re-letting readily when vacancies arise. Our bull case valuation suggests the shares are worth 475p, assuming five-year capital growth of 5 per cent per year along with £50m of development profits a year out to 2018.