Forecasting future growth for McKay Securities (MCKS) isn't easy because much depends on when its development arm will mature, hence the chunky discount to net asset value (NAV) in the share price. However, one thing is clear, which is that at the 31 March 2017 year-end there was the potential to boost annual rents by an estimated 40 per cent, or £9.3m, if McKay can let out speculative developments and hike the rents to market rates at some of its already-let properties.
- Strong rental income stream
- Deep discount to NAV
- Significant reversionary potential
- Extensive redevelopment pipeline
- Development arm still speculative
- Delays could lead to greater void period
A significant proportion of this so-called 'reversionary' potential will crystallise very soon because its entire speculative development in Reading, covering nearly 40,000 sq ft and accounting for a fifth of its development void reversion, has recently been let to creative workspace pioneer Spaces. What's more, the lease term is a decent 15 years with a 10-year break option, and the rent is 3.3 per cent ahead of the March 2017 estimated rental value.
Of the other two projects, Prospero is Redhill's first new office development for 10 years and covers over 50,000 sq ft over four floors. The top floor has already been let at a new rental high for the town of £31 per sq ft. The other site is 30 Lombard Street in the centre of London. Work there is progressing on the 58,000 sq ft office block, with completion due in mid-2018, and will be offered to one client or a number of shared tenants.
Next in the pipeline is the potential refurbishment or redevelopment of a 96,850 sq ft warehouse next to junction 12 on the M4 motorway. This was bought in 2015 and there is a tenant break agreement in 2018 before the lease expires in 2021. This is ideally suited to meet a pressing need for last-mile delivery sites for retailers. To meet this demand, planning applications will be submitted to redevelop the site for up to four warehouse units totalling 135,000 sq ft.
| MCKAY SECURITIES (MCKS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 229p | MARKET VALUE: | £215m | |
| TOUCH: | 228.5-229p | 12-MONTH HIGH: | 240p | LOW: 140p |
| FORWARD DIVIDEND YIELD: | 4% | TRADING STOCK: | £5.5m | |
| DISCOUNT TO FORWARD NAV: | 26% | NET DEBT: | 51% | |
| INVESTMENT PROPERTIES: | £423m | |||
| Year to 31 Mar | Net asset value (p) | Net rental income (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2015 | 270 | 14.9 | 5.2 | 8.7 |
| 2016 | 301 | 17.7 | 7.8 | 8.8 |
| 2017 | 303 | 19.9 | 9.2 | 9 |
| 2018* | 305 | 19.5 | 8.7 | 9.1 |
| 2019* | 311 | 21.1 | 8.7 | 9.2 |
| % change | +2 | +8 | - | +1 |
Normal market size: 1,500 Matched bargain trading Beta: 0.01 *Stifel forecasts, adjusted EPS and NAV | ||||
Partial refurbishment has also been completed at the Mille office building in Brentford, and the newly refurbished units have been let at £26 per sq ft, a 30 per cent increase on the estimated rental value at acquisition in 2014. Even before including all of these, net rental income in the year to March 2017 grew by 12 per cent to £19.9m. Despite all this, the shares trade at a 26 per cent discount to forecast NAV.
That discount reflects the fact that the development arm remains speculative as no clients have been formally announced, but as well as the encouragement that can be taken from the recent Reading let, investors should be able to find some reassurance in the 43 per cent increase in rents and 69 per cent rise in portfolio value achieved since McKay's 2014 capital raising.
