U and I Group (UAI) has changed radically since new management changed the company's name a year ago from Development Securities. The company is now concentrating on building a portfolio of large regeneration projects, as well as establishing specialist off-balance-sheet ventures with capital partners to target exciting areas such as the emerging build-to-rent sector. A huge yield and massive discount to forecast net asset value (NAV) don't do justice to either the progress made to date or future prospects.
- Sector-leading dividend projected
- Huge discount to net asset value
- Modest level of debt
- Significant strategic progress
- Development income lumpy
- Referendum uncertainty
U and I's shares have suffered since the Brexit vote, but last month's half-year results provided grounds for encouragement. The referendum outcome saw broker Peel Hunt downgrade development profit forecasts for the current year to £32m compared with company guidance of £42m in April. However, forecasts had to ratchet up again last month when U and I announced only marginally reduced guidance for the year of £35m-£40m. This was underpinned by a £11.5m first-half profit, compared with its guidance of £8m, along with a further £11m profit in the first month-and-a-half of the second half. In addition, earlier this month the company announced a £3.5m profit from the sale of Elizabeth House in Woking. In the first half, £17m of assets were sold as part of the repositioning of the business and a further £125m-£140m-worth of sales are expected.
Other encouraging first-half progress included the signing of a £200m capital partner, which should help progress U and I's plans to move into the build-to-rent market. The company also looks set to create £2m of efficiencies by 2018, split between cost-cutting and new management fees. Furthermore, U and I secured four major project wins in the past nine months, which have added more than £1.5bn to the gross development pipeline. All this bodes well for management's target of producing development and trading gains of more than £50m per year and a post-tax total return of 12 per cent within the next three to five years.
As part of the strategic changes, the company has also revised its dividend policy. As well as a fixed ordinary dividend (5.9p last year) the company will look to pay supplemental dividends equivalent to 40-50 per cent of free cash flow. While an 8p special dividend was paid in both 2015 and 2014, free cash flow can be expected to be lumpy as it is affected by a host of factors, including capital requirements, debt targets and operating costs, as well as the timing of property sales and development gains. However, based on the current work in progress, Peel Hunt forecasts dividend yields over the next three years of 5 per cent, 11 per cent and 10 per cent.
| U and I (UAI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 158p | MARKET VALUE: | £198m | |
| TOUCH: | 158-160p | 12-MONTH HIGH: | 231p | LOW: 140p |
| FORWARD DIVIDEND YIELD: | 11.3% | TRADING PROPERTIES: | £213m | |
| DISCOUNT TO FORWARD NAV: | 48% | |||
| INVESTMENT PROPERTIES: | £256m | NET DEBT: | 38% | |
| Year to 1 Mar | Net asset value (p) | Net operating income (£m)* | Earnings per share (p)* | Dividend per share (p)* |
|---|---|---|---|---|
| 2014 | 262 | 39.2 | 9.7 | 5.6 |
| 2015 | 276 | 55.1 | 19.2 | 13.9 |
| 2016 | 291 | 58.8 | 20.1 | 13.9 |
| 2017* | 280 | 46.9 | 11.5 | 8.9 |
| 2018* | 304 | 77.3 | 31.2 | 17.9 |
| % change | +9 | +65 | +171 | +101 |
Normal market size: 1,000 Matched bargain trading Beta: 0.37 *Peel Hunt forecasts, adjusted NAV and EPS figures. DPS includes special dividends | ||||
