Workspace looks oversold considering its results

With the UK headed for a recession, the cost of debt rising, and commercial property values plummeting across the board as a result, you might have imagined that Workspace (WKP) would be struggling. Yet, the opposite seems to be the case. It posted a 10-fold leap in pre-tax profit in its results for the six months to 30 September thanks to increases in revenue, rental income and – most surprising of all – the value of its property portfolio.

How? Mostly because Covid-19 hit its revenue and value so hard the year before that some sort of recovery was inevitable, but also because the sorts of assets Workspace owns are the sort of assets that wavering office tenants in the post-Covid, hybrid working world are after: short-term, low-commitment leases on medium-sized buildings spread across London.

The model has worked, and its results show that, but the equity market has not recognised this. The stock trades at a 50.8 per cent discount to net asset value, has a price/earnings ratio of 14 and a 4.8 per cent dividend yield. These metrics hardly represent a vote of confidence, but given the real estate investment trust's unusual business model, they could represent an attractive entry point.

That does not mean there are no bear points for Workspace. Impressive though its profit recovery is, the company is far off its half-year pre-tax profit of £99mn from 2019 or the £102mn it posted in 2018, and analysts are not predicting that it will get there any time soon. The company has also taken on more debt. It is not an eye-watering amount relative to its equity, but investors are right to question the timing of the move considering rising interest rates.

These are legitimate concerns to be sure. Still, we think the market has blown them way out of proportion. Buy.

Last IC view: Buy, 728p, 8 Jun 2022