UK Edition
Questor: buy Land Securities – it has battened down the hatches but 33pc discount remains
Property stocks have featured heavily among Questor’s recent tips and we make no apology for it: the companies recommended have offered robust business models along with valuations depressed by an excess of pessimism over the likely effects of Brexit, among other things.
This week we feature another: Land Securities, one of the giants of the British commercial property market, whose assets include office space in the City of London and hotels and shopping centres around the country.
Chief among its attractions, according to Simon Gergel, who last year bought a stake in the firm for the Merchants Investment Trust, is the 33pc discount at which the shares trade relative to the value of LandSec’s assets.
Gergel acknowledged that investors were nervous about City office space because of the possible impact of Brexit on financial services and about retail property because of the rise of online shopping. But he described the level of LandSec’s discount as “extraordinary” in view of the “cautious” stance adopted by the company to ride out the current uncertainty.
This caution includes avoiding speculative development and restructuring the company’s debt so that it matures later and costs less, Gergel told Questor.
The moratorium on speculative building means that almost all of its property is let, typically on long-term contracts, so the company’s income is highly secure. In fact it is on course to grow slightly as certain lettings “bed in” and introductory rent-free periods come to an end. The company should also be able to increase rental income to some extent via “non-speculative” development, which means, for example, building more space for a tenant that wants to expand.
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Gergel added that prime shopping centres, such as LandSec’s Bluewater in Kent or Westgate in Oxford, “should benefit from trade concentrating in the best venues”.
He said the “real risk” was falling property values and that the current large gap between the share price and the value of the company’s assets reflected a “lack of trust” in the stated asset values.
But he pointed out that many property transactions had taken place “at prices in line with current valuations” and added: “Even if values did fall by say 10pc, we would expect the discount to shrink as investors sensed the bottom of the cycle. The shares are priced for a very harsh environment – the market is too pessimistic. All it needs for the discount to narrow would be for conditions to carry on as they are without disaster. There doesn’t need to be a positive catalyst.”
Gergel concluded: “There is absolute value here, not just relative to the stock market.”
Questor says: buy
Ticker: LAND
Share price at close: 935.1p
Update: Royal Bank of Scotland
This column tipped RBS about a year ago at 252p and the shares have gained a respectable 5.6pc since then. Yesterday, however, they fell by 5.3pc from 280.9p to 266p because of the sale by the Government of a significant part of its stake.
Such a fall in the price is inevitable when such a large sale is made because it swamps the normal level of demand for the shares; buyers for the additional stock can be found only if they are offered a substantially better price.
In fact, the Government got 271p for its shares, which went to institutional investors. The state still owns 62.4pc of the bank, so further large share sales can be expected over the next few years. Investec, the broker, reckons the bank should be fully back in private hands by 2023.
Not all of the shares will be sold in the same way, however: some are likely to be bought back directly by the bank from the Government. This would avoid disrupting the market price and reduce the number of shares in issue, which improves earnings per share.
Investors can also expect to receive their first dividends since the financial crisis before long. Investec forecasts 5p a share for the 2018 financial year, followed by 10p and then 15p a share in the following two years.
Questor says: hold
Ticker: RBS
Share price at close: 266p