UK Edition
Questor: buy unloved British Land and enjoy its 4.6pc yield while you wait for sentiment to improve
This column is well aware that some of its well-intentioned contrarian ideas – Marks & Spencer, Centrica and Severn Trent – have turned into painful value traps and done more harm to portfolios than good, at least so far.
But with the view that the hardest, bravest decisions can be the most profitable ones (going against the crowd and looking at unloved stocks) and the easiest ones the most dangerous (going with the crowd and buying what is loved and has already done well), the next attempt to find a nugget of value comes in the shape of British Land.
The FTSE 100 group is a real estate investment trust (Reit) and runs a portfolio of commercial property that is split roughly equally between offices and residential sites on one hand, and retail sites on the other.
This will already be making investors of a nervous disposition look the other way. Concerns over what Brexit may mean for the City and the financial services industry hang over one half of the business and the cacophony that is proclaiming the death of bricks-and-mortar retail hangs over the other.
Yet this is precisely the point. Such concerns are not new, may prove overblown and may be at least partially reflected in the valuation. British Land’s net asset value (NAV) per share, as disclosed in November’s interims, is 939p. The shares therefore trade at a discount of nearly 30pc to that.
There can be no denying that rents and capital values could come under pressure in the event of a hard Brexit, an economic downturn or further retail fallout. But the big discount to NAV at least partly prices that in already and this is not going unnoticed.
Hammerson had launched an all-share bid for fellow FTSE 250 Reit Intu, only to itself receive a cash and shares bid from France’s Klepierre. And as Questor has pointed out previously, Hong Kong billionaire Samuel Tak Lee has continued to build his stake in another FTSE 250 Reit, Shaftesbury.
Someone, somewhere thinks British Reits offer value and perhaps investors could take the hint. However, patience and nerve will clearly be required as it is hard to spot what catalyst could quickly change the perception of British Land or the wider sector, and move the narrative beyond Brexit and retail gloom.
It could take time – perhaps until December 2020 or beyond – but at least investors will be getting a decent yield while they wait.
British Land is best suited to patient, risk-tolerant portfolio builders but the depressed valuation may tempt value hunters.
Questor says: buy
Ticker: BLND
Share price at close: 635p
Update: Interserve
Thankfully, this column spotted Interserve as potential trouble at around the 300p mark in December 2016 and was able to sit back and watch as the combination of business complexity, thin margins, problematic contracts and, above all, lofty debts crushed the share price.
Last Thursday’s announcement that its lenders have agreed to postpone a key debt covenant test until April 30, coupled with the emergence of private equity firm Emerald as a big buyer of the group’s debt, reduces the risk that Interserve will follow Carillion into oblivion.
That explains why the shares are rallying and some short-sellers may be closing their positions to lock in a profit. But the company still faces huge challenges and the appearance of buyers of the debt does not necessarily mean good news for would-be buyers of the shares.
Interserve may well still need a refinancing. Any debt-for-equity swap or fundraising via a share sale to reduce the £500m-plus debt pile to more manageable levels is likely to be highly dilutive, and therefore very expensive, for existing shareholders.
Even if it pulls that off, the company would still have to work out what it wants to do, and demonstrate that the business has a viable and defensible competitive position that is capable of providing good margins and solid cash flow over time.
Interserve may no longer be an outright disaster, now that the immediate danger of financial failure appears to have been averted, but the risks associated with buying its shares simply remain too high.
Questor says: avoid
Ticker: IRV
Share price at close: 92.45p
Russ Mould is investment director at AJ Bell, the stockbroker