This trust suits a certain type of investor, and not just those who like long corporate names. As the name suggests, this Reit draws income from the rents it charges supermarkets. It is therefore suited to the more risk-averse, who may shy away from the full glare of grocery competition but want to benefit from long-term rising standards of living.
Reits invest directly in property, avoiding the double taxation that can arise from the traditional corporate structure or buying plc shares. UK tax-exempt investors can receive returns gross, as if they were buying properties directly and Reits are legally obliged to pay 90 per cent of their income. Last April’s corporation tax rise from 19 per cent to 25 per cent increased Reits’ charms, as they sidestepped that imposition.
Supermarket Income Reit’s portfolio has 73 UK shops worth more than £1.7 billion, focused mainly on large, edge-of-town outlets that offer click-and-collect or online delivery services. It has been a proxy for Tesco and Sainsbury’s, as they accounted for 77 per cent of the rent at last June’s financial year-end.
It is also landlord to Waitrose, Morrisons, Asda, Marks & Spencer, Lidl and Aldi in the UK. The UK-only policy is changing with the recent €75 million acquisition of 17 Carrefour outlets in France. They have a weighted average lease term of 12 years, with a break option in the tenth year. Annual uncapped inflation-linked rent reviews will add to the initial 6.3 per cent yield and Carrefour is keen to emulate the UK’s 12 per cent of online revenues.
It is a tiny addition to the portfolio but its significance is that it marks a fresh diversification strategy. Its investment policy allows for up to a fifth of total assets to be in either UK non-grocery assets or non-UK grocery assets. About 6 per cent is in the former and the Carrefour buy amounts to a further 4 per cent. That suggests that another €182 million is available for deployment abroad, a limit that can always be adjusted with shareholder consent if the foray proves successful. France ticks several boxes, not least because of its proximity and, although rents there tend to be lower than in Britain, European interest rates are lower, opening a wider margin for Supermarket Income’s borrowings.
More crowded territories such as Belgium or the Netherlands may offer even better returns and the Reit’s investment adviser is not ruling out moves to the US or Asia. That will change the nature of Supermarket Income as an investment and, although it will increase risk, it should be positive if the expansion is carefully managed.
When it floated in 2017 management thought supermarkets were about to enter a more placid period. They could not have envisaged the pandemic, Ukraine conflict and supply-chain blockages, leading to higher interest rates and last year’s cost of living crisis, all of which have depressed retail rents. Cheaper interest and shrinking inflation will help the foreign ventures in the medium term but in the short term the trust may suffer from smaller inflation-linked rent rises. Its loans are a modest 37 per cent of asset value.
The shares trade at a prospective 12.1 times current-year earnings. The price is 15 per cent shy of the official net asset value, boosting the dividend yield to 8.3 per cent.
Last month the board announced an interim dividend for January to March of 1.515p per share, up from 1.5p this time last year, to be paid as a Property Income Distribution. That usually means 20 per cent tax is withheld and has to be claimed back if the shares are held in a tax shelter such as an Isa. Prospective investors should consult professional advisers to ensure that the Reit format is right for them, but subject to that Supermarket Income looks on course for recovery and expansion.
ADVICE Buy
WHY Scope for growth to back a generous income
Elementis
At first blush, Elementis has plenty going for it. The company’s cosmetic coatings operations generate a steady stream of new lipstick colours and the industrial side helps to make vehicles lighter and therefore cheaper to run. It also produces antiperspirants and adhesives. But the company is being circled by activist investors, one of whom has accused the management of “failure of judgment”.
Gatemore Capital Management has published an open letter accusing executives of poor capital allocation and operational underperformance, adding that its latest proposals reflect “questionable timing, a lack of ambition in the pace and ultimately a lack of commitment to value creation”. Those proposals include a $20 million organisational restructuring and $10 million savings from greater procurement and supply chain efficiencies. Gatemore has had mild support from the company’s biggest shareholder, Franklin Mutual Advisers.
To these barbs the chief executive, the US-born ex-BP manager Paul Waterman, said: “Elementis has had a good start to the 2024 financial year. I am confident that our clear strategy will allow us to achieve a significant improvement in our full-year performance.”
Last year revenue fell 3 per cent to $713 million, but adjusted operating profit rose 3 per cent to $104 million, thanks to higher prices and lower costs. The adjusted operating margin edged up from 13.6 per cent to 14.6 per cent. Cash and cash equivalents improved after having slumped in 2022, allowing a reinstated dividend.
In the first three months of 2024 revenue, profit and margins all increased, prompting an upgrade to “buy” from HSBC, saying that the company had shown resilience in a challenging environment. The shares hit a 278p pre-Covid peak in 2017 and were devastated by the pandemic, collapsing from 179p to 49p. Since stabilising three years ago the price has gone nowhere. The missing ingredient is a takeover bid, although it has seen off three during Waterman’s eight-year reign.
Investors can take comfort from an undemanding 2023 p/e ratio of 13.6 and a tentative 1.4 per cent yield. Both should improve this year.
ADVICE Buy
WHY Takeover possibilities are in the price for nothing