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CLS discount is too deep

The European office landlord has sufficient liquidity to withstand shorter-term pain
June 4, 2020

Concern around the resilience of CLS’s (CLI) income stream has caused the shares to trade at a sharp discount to forecast net asset value (NAV), and well below its own historical average and the broader sector. However, we think the commercial landlord’s access to cash and limited development activity mean it has the balance sheet strength to withstand the financial strain placed on businesses.

IC TIP: Buy at 199p
Tip style
Value
Risk rating
High
Timescale
Long Term
Bull points

Rent collection higher than peers

Increased cash balance

Steep discount attached to the shares

Diversified tenant base

Bear points

Potential fall in property values

Potential loss of rental income

The group lets office space across the UK, Germany and France to a broad range of tenants, with government agencies and major corporations, such as its largest tenant the UK's National Crime Agency, accounting for 48 per cent of contracted rent. Less than 6.5 per cent of tenants by contracted rent are in the retail, leisure, travel, private education or serviced office sectors.The group's rental income in the UK and France is due on a quarterly basis, while German rent is monthly. By 7 April the group had collected 84 per cent of rent due, rising to 87 per cent after taking into account tenants that have switched to monthly payments. That was a higher level than peers such as Great Portland Estates, (GPOR), Helical (HLCL) and Derwent London (DWN). 

Admittedly, rental income could come under further pressure at the next quarterly payment date this month as tenants manage the gradual increase or resumption in trading with the cost of lockdown and broader social distancing measures. The cyclicality of the group’s operations is reflected in the volatility of the shares and wide discount to forecast NAV. 

Yet, crucially, CLS has increased cash available to help it deal with the current crisis after disposing of its 10.5 per cent stake in Swedish logistics property specialist Catena and other non-core regional assets last year. Cash stood at over £235m at the start of April and it had a further £50m in undrawn facilities. Although the group has £115m of debt due to be refinanced this year, £26m has already been extended by between six and 18 months and a term sheet has been agreed on the largest refinancing, for a new seven-year loan. 

Management does not disclose individual covenants, although last year debt on the acquisition of Office Connect, Cologne, was secured at a 65 per cent loan-to-value (LTV) limit. Analysts at Liberum estimate that in order for gross LTV at group level to rise to 65 per cent, property values would need to decline by an average of 32 per cent across the group.

CLS has a solid track record of maintaining progressive dividend payments, which continued during the aftermath of the 2008 financial crisis. In late April the group proceeded with paying a final dividend of 5.05p a share. Analysts expect that progressive dividend to continue this year, with consensus forecasts of 8p a share in 2020.

CLS (CLI)    
ORD PRICE:199pMARKET VALUE:£811m
TOUCH:199-201p12-MONTH HIGH:323pLOW: 153p
FORWARD DIVIDEND YIELD:4.2%TRADING PROPERTIES:£10.4m
FORWARD DISCOUNT TO NAV:45%NET DEBT:53%
INVESTMENT PROPERTIES:£1.96bn  
Year to 31 DecNet asset value (p)*Pre-tax* profit (£m)Earnings per share (p)*Dividend per share (p)
201728619112.66.4
201831012313.16.9
201932915912.07.4
2020*338819.97.9
2021*36517611.98.4
% change+8+117+20+6
Normal market size:2000   
Beta: 1.23   
*Berenberg forecasts, adjusted NAV, PTP and EPS figures