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

The Daily Telegraph - Business - - Business - Russ Mould is in­vest­ment di­rec­tor at AJ Bell, the stock­bro­ker

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.

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