- Increased revaluation surplus
- Hefty discount to NAV
It probably doesn’t pay to try and second-guess the London office market given external issues. Yet Derwent London (DLN) maintains that the “continuing flight to quality” supports its business model despite wider macroeconomic uncertainties and the evolution of hybrid working patterns. Rents and yields in the London office market were stable through the first half of the year, although there has been upward pressure on yields since the period end and it may be too early to gauge the ripple effects of the inflationary surge.
Reported profits were up though the period, a consequence of a revaluation surplus of £74.1m, set against the £58.1m recognised in H1 2021. Taking account of fair value movements, EPRA earnings were 53.1p per share, 1.7 per cent down on the 2021 comparator. Total return for the period increased by 30 basis points to 3 per cent, partly reflecting the 53.5p dividend that was paid in June 2022.
The group seems to have been better insulated against volatility in the market because of the up-scale nature of its property portfolio, together with bespoke leasing arrangements, arguably a prerequisite following the disruption wrought by the pandemic. Management notes, however, that there is a stark divergence between the City and West End markets, evident in respective vacancy rates of 12.3 and 4.3 per cent, with the latter measure falling back in line with the long-term average. At any rate, total lettings of £7.1mn were above the group’s December estimated rental value.
Management is certainly cognisant of the external issues which could slow office take-up through the remainder of this year and beyond, so it is guiding for average rental growth in the portfolio of between 0-3 per cent, following 0.9 per cent growth in the first half. Despite near-term challenges in the office market, we think the hefty discount to NAV still warrants a buy call. Buy
Last IC view: Buy, 3,078p, 24 Feb 2022
DERWENT LONDON (DLN) | ||||
ORD PRICE: | 2,696p | MARKET VALUE: | £3.03bn | |
TOUCH: | 2,694-2,704p | 12-MONTH HIGH: | 3,850p | LOW: 2,554p |
DIVIDEND YIELD: | 2.9% | TRADING PROP: | £31mn | |
DISCOUNT TO NAV: | -33.0% | NET DEBT: | 30% | |
INVESTMENT PROP: | £5.5bn |
Half-year to 30 Jun | Net asset value (p) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
2021 | 3,864 | 121 | 107 | 23.0 |
2022 | 4,024 | 137 | 121 | 24.0 |
% change | +4 | +13 | +13 | +4 |
Ex-div: | 08 Sep | |||
Payment: | 14 Oct |