Canary Wharf sings for Songbird
SMALL CAP COMMENT
LAST WEEK, Songbird Estates ( 150p), the Aim-listed holding company for Canary Wharf, said the value of its assets had jumped to 156p per share. Songbird was listed at 100p in June 2004 when Morgan Stanley’s Real Estate Fund (MSREF) and other investors won a protracted bidding battle for Canary Wharf using the holding company as the acquisition vehicle.
So on the face of it the 50 per cent increase in the value of the shares is a good return. However, we believe that because of the leveraged nature of the fi nancing – there are two layers of debt attached fi rst to Songbird and secondly to the individual buildings that make up the Canary Wharf portfolio – the increase in the value of the underlying property should be greatly magnified.
Some property investors estimate that the fair value for the shares should be at least 200p. Buy.
SHARES in Datamonitor, the market analysis company, have had a spectacular run after a difficult period following its float at 70p in 2001. Since slumping to a low of 17 · 5p in August 2002, the shares have risen by more than 10-fold and are up by 58 per cent this year alone.
Last week, Datamonitor revealed a 168 per cent rise in interim pre-tax profits to £4 ·3m – a move which is likely to lead analysts to upgrade their full-year forecasts from the current £ 8 · 5m.
Datamonitor’s strategy has been to boost cross-sales of products to customers partly by snapping up a series of complementary research fi rms in the past year. Last month it paid £4 · 7m to buy Verdict, the analysis company. We last tipped the shares (200p) at 161 · 5p in May and while they are trading on around 20 times this year’s earnings – a tidy premium to the media sector – there should be further go. Buy.
SMC GROUP ( 68.5p), the Aim- listed holding company for a group of architect and design practices, is expanding rapidly. The company fl oated in June at 43p and has continued to grow revenues by winning new work. It has an impressive client list of developers including Canary Wharf and British Land and retailers such as supermarket chain Wm Morrison. The business looks pretty solid since more than 50 per cent of its work is repeat business.
SMC is also planning to grow by buying new practices and is believed to be close to announcing its fifth earnings enhancing acquisition this week. The deal remains under wraps, but is likely to strengthen SMC’s presence in the UK regions. Buy.
WE LAST tipped shares in FDM Group in April at 82p, shortly after the IT staffing business fl oated on Aim at 78p. Since then the shares have ticked up to 104 ·5p, to give readers who followed our advice a decent 27 per cent profi t. Last month, FDM delivered a solid set of interim results with a 17 per cent rise in operating profi ts.
FDM has an interesting model where it trains its own IT staff who are then placed with clients; the result is far higher gross profi t margin of more than 40 per cent, around three times those gained when freelance staff are used. FDM has a strong track record and current trading also appears strong with a 20 per cent increase in clients in the first half. However, the shares are trading on an earnings multiple of just 16 times – hardly demanding for a solid growing business. Keep buying.
Canary Wharf: sky-high leverage