UK Edition
Questor: this stock has gained a third since we tipped it but there should be more to come
Questor share tip: Derwent London, the property company, has virtually no unlet space and rents are growing well
A share price increase of more than a third since we first looked at Derwent London in November 2016 means the real estate investment trust (Reit) is no longer as cheap as it was.
Even so, a 15pc share price discount to the last published net asset value per share (NAV) figure gives us some room for manoeuvre, especially as there is long-term potential for the property portfolio to rise in value.
Last week’s first-quarter trading statement showed that the company’s prime London assets were still attractive to tenants, who themselves hail from a wide spread of industries ranging from media and retail to leisure, finance and government.
Derwent London also has an exciting development pipeline in more plum London spots, notably W1, W2 and EC1. Nearly two thirds of a million square feet of new space is already pre-let. The group vacancy rate is just 1.7pc and so far this year net lettings have been struck at an average of 6.2pc above December 2018’s estimated rental value.
This gives grounds for optimism that asset values can remain firm and confound those who fear retail exposure or are more concerned about the health of the economy more generally.
Although net debt crept up a little to £981m between December and March, Derwent is borrowing just 17.5pc of the value of its property and the company has £500m in undrawn debt and cash at hand.
This gives the incoming chief executive, Paul Williams, who will take the reins from John Burns after the annual meeting on Friday, plenty of scope to look for further opportunities in what is a truly global city.
The yield of 2.2pc may not sound like much, but Derwent also has an excellent record of dividend growth: the payment has increased by nearly 200pc over the past decade.
The stock still has the potential to provide capital appreciation and income for patient portfolio builders.
Questor says: hold
Ticker: DLN
Share price at close: £32.66
Update: Nichols
This column’s faith in Nichols, the soft drinks maker, is finally getting its reward and investors can continue to draw comfort from the company’s 22pc operating margin, 28pc return on capital employed and net cash on the balance sheet.
A 7pc increase in UK sales in the first quarter showed that the company, which makes Vimto, Feel Good, Sunkist and Levi Roots drinks, had coped admirably with, and adapted swiftly to, last year’s imposition of the sugar tax.
Better still, international sales soared by 24pc thanks to a return to growth in the Middle East, where a plunge in sales to Yemen in particular had hobbled progress and prompted some earnings disappointment in late 2017.
The only slight knock on the stock is the valuation. A price-to-earnings ratio of some 24 and yield of 2.1pc for 2019 mean Nichols is no bargain, especially as earnings growth is expected to run at 5pc-6pc on a trend basis.
But those high margins and returns on capital should allow profits and dividends to compound strongly over the long term to the benefit of patient investors.
Questor says: hold
Ticker: NICL
Share price at close: £17.85
- Read Questor’s rules of investment before you follow our tips
Update: Keystone Law
A slight pullback in the share price of Keystone Law, the “challenger” law firm, should not be of undue concern as we already have a paper profit of 25pc following our analysis late last year.
The pause for breath is probably healthy and the full-year results earlier this month gave every indication that the company’s platform-based model was working, judging by growth in sales and profits (adjusting for flotation costs) of 35pc and 88pc respectively and a maiden full-year dividend of 9p a share, 1.5 times covered by earnings.
Keystone also added 55 more fee earners to its books as its rapid growth and platform model saw applicants flock to join. That could set the scene for future increases in profits, earnings and the dividend, which is also supported by net cash on the balance sheet, the result of Keystone using some of the proceeds of its flotation in November 2017 to pay off its debts.
However, the valuation is rich so this one is still best suited to risk-tolerant momentum seekers.
Questor says: hold
Ticker: KEYS
Share price at close: 485p
Russ Mould is investment director at AJ Bell, the stockbroker. For the best of the Telegraph's investment analysis, advice and expert opinion, sign up to our weekly newsletter.