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CLS looks too cheap, but the market isn't buying it

The property company has a strong and diverse portfolio, with a very secure tenant base, but real estate is out of favour
August 18, 2016

Half-year results from CLS Holdings (CLI) demonstrated the positive attributes of a diversified investment portfolio (UK 63 per cent, Germany 20 per cent, France 17 per cent). Along with low debt costs and foreign exchange gains, this helped to lift adjusted net asset value by 10 per cent from a year earlier to 2,282p a share, while net rental income grew by nearly 3 per cent to £51.2m. The drop in headline profits reflected a smaller revaluation uplift of £2.4m compared with £53.9m a year earlier.

IC TIP: Hold at 1350p

Half of UK rental income comes from government departments, which aren't going anywhere fast. New lettings and rent reviews in London were achieved at 5.9 per cent above estimated rental value (ERV), while activity in Germany remained strong, pushing the vacancy rate down to 2.1 per cent and delivering rents on new lettings and renewals 4.7 per cent above ERV.

In place of an ordinary dividend payout CLS is proposing to distribute £7.2m through a 1-in-95 shares buyback at 1,650p a share, a 22 per cent premium over the share price on the day, which together with a similar earlier scheme equates to a dividend yield of 3.2 per cent on the average share price in the first half.

Peel Hunt forecasts adjusted net asset value at the December 2016 year-end of 2,185p, from 2,083p a year earlier.

CLS HOLDINGS (CLI)
ORD PRICE:1,350pMARKET VALUE:£556m
TOUCH:1,350-1,383p12-MONTH HIGH:2,022pLOW: 1,125p
DIVIDEND YIELD:nil*TRADING PROPERTIES:£15.8m
DISCOUNT TO NAV:31%
INVESTMENT PROPERTIES:£1.45bnNET DEBT:83%

Half-year to 30 JunNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p*)
2015165880.2161nil
2016195233.171nil
% change+18-59-56-

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Payment:-

*See text for share buyback details