Harworth's discount ignores its growth potential

Some investment cases are simple to make. For Harworth (HWG), it is consistent asset value growth. Despite an interest-rate-driven downturn in the property market last year, sending its peers' net asset values (NAVs) tumbling, the warehouse developer and landholder has more than doubled its NAV from 97p at the end of 2013 to 197p at the end of 2023. In every year across that decade, the growth has been consistent.

Once again, simplicity is the key to this. Harworth owns the sort of real estate assets buyers want regardless of what interest rates are doing. It has a large landholding, which it either sells to housebuilders or develops into warehousing when it has secured a pre-letting from a warehouse occupier. Land for housebuilding is always in demand, even in a downturn, because housebuilders need to plan long-term, and the non-cyclical rise of online shopping drives demand for warehouses.

The 'wait and build' approach also means low leverage, much lower than its listed real estate equity peers. Yet, despite this, Harworth trades at a significant double-digit discount to its NAV, which heavily underplays its potential for future NAV growth and history of delivering it. According to consensus analyst forecasts, the NAV will hit 236p by the end of 2025. That looks overly bullish, but even the lower end of those estimates at 220p is much higher than the current share price.

The market bearishness may reflect how revenue, earnings, and (by extension) dividends, have fluctuated over the decade. Some years, booming land sales and warehouse lettings drive the numbers. In other years, not so much. That is not great for income investors.

Those bear arguments are fair, but on balance we feel the NAV growth story is too compelling to ignore. We maintain our rating. Buy.

Last IC view: Buy, 104p, 12 Sep 2023