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Has LandSec passed the bottom?

After beating analyst forecasts again, the shares’ big trading discount looks like less of an omen
Has LandSec passed the bottom?
  • Valuations stabilise, as rental income jumps
  • MediaCity and U+I bids boost investment options

In the five years before the pandemic, the gradual slide in the shares of Land Securities (LAND) disguised a positive earnings trend. Unsurprisingly, that all changed with results for the year to March 2020, which landed 13 per cent below already suppressed market expectations. Interim EPS for FY21 were even worse, falling 17 per cent short of consensus.

Calling the bottom is never easy. But investors can now point to two consecutive six-month periods in which earnings for the shopping centre-to-office landlord have both climbed and beaten analyst forecasts. Half-year EPRA earnings of 24.3p per share were 14 per cent ahead of a FactSet-compiled estimate and suggests the 37.6p full-year prediction will need upgrading.

Key to the swing in net rental income was the stability of regional retail and sub-scale tenants. This meant that while gross income fell, LandSec recorded a £3m write-back to its bad debt ledger in the six months to September, versus a negative movement of £87m last year.

“Cautious optimism” was the underlined soundbite from chief executive Mark Allan, a take which the market appeared to share. Lease activity has also jumped among retail tenants, and matched expectations among office and workspace customers.

But the case for a near-term correction in the shares, whose longer-term trajectory has followed a declining book value and which at 721p trade a quarter below the March 2022 consensus estimate, remains thin. For a re-rating to occur, the market will need to see a bigger step up in the value of the like-for-like portfolio, which has risen just 0.1 per cent to £9.68bn since March.

Ongoing developments showed greater progress, in part thanks to a £33m profit release ahead of the completion of the 21 Moorfields site. Proposed development values fared less well, declining 5.5 per cent on swelling cost budgets and “Covid-19 related impacts”.

As with British Land (BLND), the pivot to mixed-use development activity and fit-for-purpose assets is sensible, but will prove gradual.

It will also come with big capital commitments, such as the freshly signed £426m majority stake in Salford’s MediaCity. That deal includes over £500m in site development options, while the £190m all-cash tilt for U+I (UAI) could unlock up to £800m in regeneration projects. A nine-year effort to reduce portfolio carbon emissions by 70 per cent (cost £135m) also looks smart, if the projected 6.6 per cent gross yield on LandSec’s first “net zero”/offset-assisted building proves accurate.

Despite the shares' big discount to net asset value, we remain on the fence. Hold.

Last IC View: Hold, 669p, 10 Nov 2020

LAND SECURITIES (LAND)  
ORD PRICE:721pMARKET VALUE:£5.3bn
TOUCH:721-722p12-MONTH HIGH:756pLOW: 600p
DIVIDEND YIELD:4.2%TRADING PROP:nil
DISCOUNT TO NAV:28.1%NET DEBT:48%
INVESTMENT PROP:£9.8bn*   
Half-year to 30 SepNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2020975-835-11312.0
20211,00327537.215.5
% change+3--+29
Ex-div: 25 Nov^   
Payment: 4 Jan^   
*Includies joint ventures. ^Relates to second interim quarterly dividend of 8.5p.