Questor: in our hunt for bargains last year we jumped too soon but St Modwen is still a hold

Warehousing, housebuilding and land regeneration specialist St Modwen Properties has yet to tear up any trees as a portfolio pick since our tip almost a year ago – we are sitting on a book loss – but that is more this column’s fault than the company’s.

In our desire to pick up bargains during the market-wide panic last spring, we moved too early. Patience would have served us better, especially as last week’s results showed an 11pc drop in net asset value per share. Nevertheless, those results still offered enough to merit ongoing interest in the stock, for three reasons.

First, St Modwen is still exposed to two sectors, logistics and housebuilding, where long-term demand looks well set whether the pandemic lingers or not. E-commerce now lies at the centre of our consumer-led society, and well-situated warehouses and logistics hubs are vital if online buying is to work smoothly.

Meanwhile, demand continues to exceed supply in the housing market, especially when it comes to the more affordable dwellings in which St Modwen specialises. These two operations represent more than three quarters of the FTSE 250 firm’s portfolio and that proportion should rise as land regeneration assets and projects are sold.

Second, NAV rose by 1pc from the end of the first half to the end of the second. This gives grounds for believing that the worst of the decline in NAV could be over, thanks to the shift in asset mix within the portfolio and the prospect of a stronger economy after the woes of 2020.

Finally, St Modwen continues to trade at a discount to NAV. A 9pc discount may not scream “bargain” but it offers protection against share price falls and the NAV should rise again as trading conditions improve.

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A modest net debt position, adjusting for lease liabilities and assets held for sale, gives further comfort, especially as asset values could halve before the firm’s banking covenants come under duress. A temporary amendment to those covenants in 2020 provides extra breathing room should events take a further turn for the worst.

St Modwen still has long-term potential. 

Questor says: hold

Ticker: SMP

Share price at close: 398p

Update: Royal Dutch Shell

It can be argued that both its full-year results earlier this month and Shell’s strategy update last week lived down to a very low set of expectations.

But the target of 4pc annual growth in the dividend raises the prospect of a yield of almost 4pc for the coming year, and shareholders now know exactly where Shell will be investing its (and their) capital

The oil giant’s $21.7bn (£15.6bn) loss in 2020 is a bit deceptive as the firm wrote down assets and contracts by more than $20bn and they are largely non-cash items.

Cash flow after capital investment and tax covered the dividend by a factor of two, and the firm has failed to cover the new dividend level (around $5.4bn a year) only three times in the past decade: in 2013 when capital expenditure went through the roof and in 2015 and 2016 when oil prices went through the floor.

Oil prices could retreat again and make Shell’s planned transition to green energy even harder to effect by depriving it of vital cash flow. But crude could also gain ground should the vaccines spark an economic recovery and higher demand for energy.

Raw material prices more generally could run strongly if theories that the return of inflation could spark a commodities super cycle play out to any degree and that could take oil shares along for the ride.

Ethical investors will be unmoved in their view that the company is not changing fast enough and that it still spends more on oil and gas exploration than it does on renewables. Shell will continue to fail their environmental, social and governance screen tests for some time to come.

Yet those value and income hunters who put returns on their money first may be more intrigued, given how the shares remain unloved, the newly reduced dividend looks underpinned by cash generation and the price of crude could yet confound the bears.

Ethical investors will continue to run a mile, but income seekers should be able to draw enough reassurance from the latest updates. 

Questor says: hold

Ticker: RDSB

Share price at close: £13.80

Russ Mould is investment director at AJ Bell, the stockbroker

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