Grainger's pipeline provides long-term visibility

Grainger (GRI) revealed a near doubling in statutory profits courtesy of an £81.2mn valuation uplift from one-off transfers and record growth in rental income, up 22 per cent to £86.3mn. The like-for-like rental growth rate came in at 4.7 per cent, while EPRA net tangible assets increased 6.7 per cent to 317p, a reflection of “a very swift return to normal levels of occupancy”.

The residential property developer and landlord is looking to meet expected long-term structural drivers, even though the market could be subject to near- to medium-term volatility. The committed pipeline of new homes “amounts to £953mn of investment to deliver 3,658 new build-to-rent homes, representing £47m of additional net rental income over the next four years”. All of this is “funded, with permissions granted and costs fixed”.

Grainger notes that the average cost of debt remained flat at 3.1 per cent, and it has hedged 97 per cent of its interest rate risk with an average maturity of six years. Interest costs are expected to grow by a relatively modest c.20 basis points over the current year. Panmure Gordon predicts that net asset value per share will increase from 325.6p to 338.7p through 2023/24 with an expanding discount rate.

Despite wider economic challenges, the developer is confident that supply constraints will continue to underpin rental income, with the shortfall in available rental properties exacerbated by the apparent exodus of small landlords. Meanwhile, the demand side of the equation could benefit from the knock-on effects of reduced mortgage affordability. The balance of risks favour strengthening performance on lettings and rental growth over the long haul even though current central bank policy may indirectly affect valuations. Buy.

Last IC View: Buy, 293p, 13 May 2022