Now is not the best time, as a private equity company, to be buying assets in continental Europe. Prices, says Simon Borrows, the chief executive of 3i, are on earnings multiples that might be a percentage point higher than available elsewhere, and that is despite the concerns over macro-economic trends.
Fortunately 3i, which has been turned around by Mr Borrows over the past couple of years, is a net seller of businesses. He has cut costs to the point where they are running well below income from management fees. He also intends to cut the number of companies that 3i is invested in, which had grown to an unmanageable size, to a more comfortable 40 or so.
That number has already been reduced from 81 to 72 over the first half to the end of September. Another seven or eight investments might well be out by the end of this financial year, including Refresco Gerber, the European soft drinks company believed to be considering listing.
This has implications for investors, because 3i pays a two-tier dividend. There is a base payment, 2.7p at the halfway stage, and a second that rewards investors from those disposals, another 3.3p at halfway.
The company has indicated that it intends to pay a minimum of 15p a share for the current financial year, 8.1p being the base payment. On that basis the shares, up 7½p at 679p, yield 3.7 per cent.
This is a decent enough income for a share that also offers a degree of capital growth. Because of when it bought into the investments and their high growth nature, 3i’s portfolio is showing a rise of annual earnings of about 17 per cent. There is every prospect that the payment will be exceeded from the proceeds of further disposals.
3i made £324 million from selling investments during the first half, down from £528 million last time. The discrepancy is almost entirely made up by the subsequent sale of its stake in Hilite, a German maker of automotive transmissions, for £155 million.
The shares have been strong performers since the market turmoil in the autumn and are well ahead of their net asset value of 358p. A good investment, but I would not be rushing to buy at this level, so hold for now.
NAV 358p/share Dividend 6p
My advice Hold
Why Shares have come up a long way and the price is well ahead of NAV. 3i remains a solid core investment with a good rate of return
One day the music will stop and the dance will come to an end. Not yet: the drivers that are pushing the London property market ever higher are still in place.
These are GDP and employment growth, says Toby Courtauld, chief executive of Great Portland Estates, whose entire portfolio is in the central parts of the capital. One study suggests that London will account for nearly a third of all the UK’s GDP growth over the next five years, while employment will grow by 6.1 per cent over the same period.
Another statistic: the amount of property available in central London, as a proportion of the total, is down to 5.4 per cent, the lowest level since 2007, before the market crash.
There is not a lot in Great Portland’s halfway figures to suggest that the music is even slowing down. The value of its portfolio is up by 8.9 per cent in the six months to the end of September, while rental values increased by 3.6 per cent. The company’s net asset value per share advanced by 11.8 per cent as a consequence, to 636p.
Great Portland chose to start building again in 2009, when many could see no value in the London market. As a consequence, it has 2.2 million sq ft available for development, enough to stretch out to 2022 without having to buy in an overheated market that has attracted excess capital, mainly from overseas — indeed, the company is likely to be a net seller for now. The loan-to-value ratio is only 22 per cent, so future development can be funded.
I have backed the shares, off 8p at 679p, before and would back them again. Buy long term.
NAV 636p/share Dividend 3.5p
My advice Long-term buy
Why Company will continue to gain from London market
The trouble with wind turbines is they don’t work when the wind isn’t blowing. This self-evident fact will be appreciated by shareholders in SSE, which I wrote about yesterday, and it will not have been missed by investors in Infinis Energy, which was floated late last year on the promise of its growing investment in wind power.
Output from its wind farms, supplying about a fifth of its output, fell by 20 per cent over the calm summer. This and the low cost of power knocked a hole in adjusted net income, which was down from £12.8 million to £10.5 million in the six months to the end of September.
On a 12-month rolling basis, wind speeds were average, and such spells of unseasonal weather tend to balance out in the end. The company is building another 130 to 150 MW of wind power over the next three years.
Infinis has indicated an 18.6p dividend for the year as a whole, well covered by cashflow. The shares, which were floated at 260p, rose ½p at 217¼p. They offer a yield of 8.5 per cent, one of the highest on the market. Worth buying for that yield, though I do not see much change of any immediate capital uplift.
Revenue £105m Dividend 6.1p
My advice Buy for yield
Why Shares offer one of the best dividends on the market
And finally . . .
Johnson Tiles, part of Norcros, was the maker of the ceramic parts of that much-visited poppies installation at the Tower of London to mark the centenary of the First World War, the company revealed yesterday. Its trading update showed mixed progress. Norcros also makes Triton showers, which rebounded in the second quarter, though the tile market remained competitive. The shares have been dull performers over the year so far, but some analysts believe that this is discounting positive news from UK housing.
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