Patience will be needed with St Modwen but the valuation looks even more interesting
The property company’s industrial and logistics assets should allow it to shine when recovery eventually comes, writes Russ Mould
THIS column’s contrarian look at St Modwen Properties in March has yet to yield any positive returns, which may be one reason for our continuing urge to do little or nothing in the current uncertain market environment.
The shares have fallen by almost a quarter and the full-year dividend has been cancelled, while last week’s trading update did not offer any immediate cheer as management warned of a potential 70pc-75pc drop in underlying earnings from operations and a decline in the value of its remaining retail assets.
Yet for all of the prevailing economic uncertainty it does not feel right to give up on the stock, not least because the balance sheet seems sufficiently strong to give management and shareholders alike plenty of time and
some protection from further falls. This is the case for three reasons.
First, there has been only a limited increase in debt from relatively low levels since last November. Second, neither asset value nor interest cover covenants on borrowing appear to be in jeopardy, especially as the latter have been amended, barring a collapse in retail rents to almost zero. Finally, no major debt repayments are due until 2023. Strategically, the FTSE 250 firm, a specialist in brownfield site regeneration, still seems to be doing the right things too. It continues to move away from retail outlets and towards projects in the industrial and logistics sectors, where the rise and rise of ecommerce is a key factor.
Meanwhile, the residential operations should benefit over the long term from what still feels like a mismatch between demand and supply. Logistics represented 44pc of total assets at the end of the last financial year in November, compared with 2pc from retail.
Then we come to valuation. St Modwen’s shares now trade at a 32pc discount to the last published net asset value per share figure of 504p. As a result, a decline in asset values in certain parts of the portfolio is already expected.
Cost-cutting programmes are under way and all investors can be now is patient. Analysts have pencilled in a return to the dividend list at some stage this year but at the moment that would be a bonus
rather than a central plank of the investment case.
A long economic downturn or second wave would leave such forecasts looking optimistic anyway. This column is still more inclined to look for firms that can make it to the other side of the pandemic without serious financial or strategic damage and the exposure to industrial and logistics sites means that St Modwen should benefit from the economic upturn, whenever it comes and in whatever shape.
Patience will be needed but the valuation looks even more interesting now. Hold.
Update IP Group
Our quest for (contrarian) value and protection from losses is working rather better in the case of IP Group.
Shares in the FTSE 250 constituent, which invests in and commercialises the intellectual property developed by British universities, have risen by 10pc since our first look in November 2019, while the FTSE 100 index has lost almost 18pc over the same period.
There is no divi and the risks involved with early-stage investments are clear but the share price resilience looks justified.
The portfolio is nicely diversified and progress at holdings such as Ceres Power, the fuel cell developer, Featurespace, the machine learning specialist, and Oxford Nanopore, the genomic sequencing expert involved in the fight against Covid-19, has allowed IP Group to raise £114m from asset sales in 2020, already beating last year’s record of nearly £80m. The proceeds will buttress a balance sheet that already had net cash.
In addition, the shares trade at a 41pc discount to their last stated net asset value of 108p. Granted, the methods used to value early-stage companies are subject to debate but such a lowly valuation factors in a lot of the dangers.
IP Group is still a risky play but it could pay off in the long term. Hold.