Questor: everyone is fearful so let’s be greedy and buy St Modwen while it is at a 12pc discount

Questor share tip: shares in the property company have slumped and it’s one to tuck away for when the recovery comes

Russ Mould 10 March 2020 • 6:00am

The Bay Campus development St Modwen is delivering for Swansea University

Given this column’s (partial) Yorkshire roots, readers will not be surprised to see a few contrarian streaks run through it – and the market’s recent tumble prompts us to search for stocks to research further as valuations become more tempting, rather than for a list of names to blindly dump.

This is very much in keeping with Warren Buffett’s counsel that investors should be “fearful when others are greedy and greedy when others are fearful”. We will apply this maxim in the case of a company we have had on the radar for a while: St Modwen Properties.

This may not prove to be the perfect time to buy but it is a better time to do so than a month ago, when the shares were trading at 530p.

A 16pc slump since then has propelled the FTSE 250 firm, a specialist in the regeneration of “brownfield” sites, to a discount of about 12pc to its last reported net asset value figure of 504p per share, rather than a premium.

Again, this may not be an optimal entry point but it is a fair one.

Yes, worries over the possible effects of the coronavirus on the economy could dampen sentiment and drive the shares lower. If so, patient, contrarian investors may wish to use it as a chance to average down. The virus is not going to knock Britain off course forever (and if it does, share prices will be the least of our worries).

If any downturn is a long one, St Modwen’s limited net debt of £298m means it should be able to weather tougher times.

Meanwhile, the steady repositioning of its portfolio of commercial property assets away from retail (shopping outlets now account for barely 2pc of the total) and towards industrial and logistics assets (44pc) could make it an interesting way to play an upturn as and when it comes.

While markets remain fearful, we can be greedy with contrarian opportunities such as this one.

Questor says: buy

Ticker: SMP

Share price at close: 445p

Update: Derwent London

Admittedly, St Modwen does not offer the 30pc discount to net asset value at which Derwent London was trading when this column first assessed the real estate investment trust (Reit) more than three years ago.

That discount has since almost disappeared and the combination of a higher valuation and a further increase in asset values has provided a capital return of more than 60pc, with dividends of 363p a share on top.

Those pleasing gains now leave us with a tricky decision on Derwent.

After a super run, the shares trade at just a 1pc discount to net asset value, so anyone who buys now is gaining exposure to the company’s portfolio of West End and fringe-of-the-City properties at a fair price rather than getting a bargain.

Now may therefore not be the very best time to build a new holding in the FTSE 250 firm, but it could still repay patience in the end.

The full-year results for 2019 showed the strengths of its £5.5bn portfolio as Derwent increased its rental income, reduced its vacancy rate, launched and quickly filled new developments, grew its net asset value per share and raised its dividend yet again.

With a nice spread of tenants between the media industry, professional services, retail head offices and retail and leisure sites, Derwent looks positioned to benefit from London’s status as a global city over the long term.

Investors just have to wait for it to get the chance, once the economy shakes off fears concerning the possible effects of the Covid-19 virus and the outcome of the transition talks between Britain and the European Union.

Derwent still feels like a solid long-term holding within a diversified portfolio.

Questor says: hold

Ticker: DLN

Share price at close: £39.20

Russ Mould is investment director at AJ Bell, the stockbroker

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