Questor: Derwent London is not quite the bargain it once was but there is long-term value here

Russ Mould 22 October 2019 • 5:57am

Questor share tip: the real estate firm has negligible vacancies and is expanding in some plum areas

The good things come to those who wait – and shares in Derwent London are now up by almost 50pc since our initial study of the real estate investment trust (Reit), helped by a recent surge amid hopes that a Brexit deal can be struck.

Whether investors think Brexit will be good or bad for the economy will be a matter of personal preference. But companies that rely on the domestic economy for their revenues and profits feel neglected by financial markets, with the result that their shares could be cheap.

This column is happy to hold on to names such Derwent London in the belief that a lot of bad news is priced in and it may not take much to get their share prices motoring.

Admittedly, Derwent shares are not quite the bargain they once were. A share price of £36.34 compares with the last stated net asset value (NAV) per share of £38.52.

An 8.3pc discount is fairly skinny, and it may not pay to chase the shares right now – although they still have long-term potential, since Derwent’s portfolio of prime properties in the capital has the scope to rise further in value over time.

The sale in August of the Buckley Building near the City brought in £99.6m net of costs, a 4.8pc premium to net asset value.

That is one indication of the value in Derwent’s portfolio, where vacancy rates were just 1.6pc at the end of June, thanks to a wide spread of tenants from companies in the media, leisure, finance and retail industries, as well as government.

In addition to its existing assets, Derwent also has an exciting development pipeline, representing 1.2m sq ft of property, in more plum London spots, notably the W1, W2 and EC1 postcodes.

Some 790,000 sq ft is already under construction and nearly 60pc of that space is already pre-let.

All of 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.

Net debt stands at £1bn but the Reit’s loan-to-value ratio is just 17.6pc and operating profits and interest income cover interest expenses by some 4.5 times, so the balance sheet looks healthy.

The yield of 2pc is not high but Derwent has an excellent record of dividend growth and the distribution could supplement further capital gains over time.

The valuation may look full in the near term but Derwent London still has the potential to reward investors over time.

Questor says: hold

Ticker: DLN

Share price at close: £36.34

Update: Gamesys

To revisit the subject of patience, shares in Gamesys are finally back to our entry point of 800p two years ago.

This is not cause for undue celebration in itself, given the two-year holding period – but it does hint at a return to market favour for “value” stocks whose potential to make healthy profits, generate cash and pay dividends may be underestimated by the market.

This is a trend that investors would do well to follow closely, as it would represent a major shift of mood were it to persist.

Read Questor’s rules of investment before you follow our tips

When we first looked at the online gaming firm it was called JackpotJoy, a moniker that quickly shifted to JPJ. The company is now known as Gamesys following its acquisition of a firm of that name for £490m in cash and stock over the summer.

The target, the original owner of the JackpotJoy brand, brings proprietary technology, strong brands and the potential for cost synergies. The drawback is that the deal delays the maiden dividend by a year but cashflow continues to be strong.

The shares look cheap on less than 9 times earnings for 2019 and barely 7 times for 2020.

Questor says: hold

Ticker: GYS

Share price at close: 802p

Russ Mould is investment director at  AJ Bell, the stockbroker

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.