Undervalued Unite raises dividend to highest ever level

The stock market is like a classroom. In theory, It rewards companies that perform well and marks down those who do not. In practice, just as teachers can sometimes fail to spot excellent students, so does the market undervalue great companies.

So it is with Unite (UTG). The student accommodation developer's share price has been flat since 2019 despite a roaring recovery after Covid-19, with sky-high demand leading to impressive rental growth and the fourth straight year of dividend increases, bringing them to their highest ever level on a per-share basis, beating the record set last year. Analyst Stifel forecasts that dividend per share will rise to 39.5p by 2025, driven by further rental increases.

So why the market scepticism? Probably because the pandemic pushed rental income off a cliff. While it may have been a black swan event, it highlighted an underlying weakness in Unite's model, with contracts that run year on year, meaning a sudden downturn in student numbers hits the business quickly.

Unite has something of a hedge against this in that contracts with universities, rather than with students, guarantee around half of its rental revenue, and the company is looking to take this relationship one step further by entering into a development joint venture (JV) with Newcastle University.

The JV, which accounts for around a fifth of its development pipeline, is the first it has done with a university. It wants JVs like this to account for half of its development pipeline in future, signing one a year, but said it has to be "realistic" as the Newcastle deal took five years to organise.

The shares trade around net asset value, which we feel undervalues the growth potential for rent and future development, with university JVs offering it a way to handle higher debt costs. Buy.

Last IC view: Buy, 944p, 25 Jul 2023