It was one of those pleasing but meaningless coincidences that saw Wells Fargo, the huge American bank, announce that it was spending £300 million on a new London headquarters near the Bank of England, one of the biggest votes of confidence in the top end of the capital’s property market in months, just as British Land released its first-quarter trading update.
The Wells Fargo deal will have been negotiated well before the referendum vote, but, like the Japanese takeover of ARM Holdings, will have been made more compelling by the fall in sterling since. British Land was conspicuous in its caution yesterday and no one knows where the property market is going. The general message, though, is that life has continued as one might expect since the referendum vote.
British Land, has, to take three straws in the wind, sold the flagship Debenhams store on Oxford Street to, one understands, the family behind the H&M fashion chain. The company has filled the last space in the Cheesegrater building. Retail lettings and renewals are coming through at the same rate as before the vote. Half its space is retail shopping centres.
This is important because in all those cases the buyers or leasers could have pulled out, taking a negative view on the UK generally. One gets the impression, in property and elsewhere, that after a couple of weeks of utter confusion the market is returning to a degree of equilibrium. That confusion meant that British Land shares were marked back to £5 on the day after the vote. They were off a penny at 628p on that first-quarter trading statement.
It cannot be said too often that the property sector, like the housebuilders, is in an entirely different place to where it was going into the financial crisis. In 2009 the company was forced to raise £740 million in an emergency rights issue. Today, with a 99 per cent occupancy rate and long lease terms stretching ahead, its loan-to-value ratio is below 30 per cent, giving enough leeway for any eventuality.
British Land will not start developing Canada Water, its next big project, until the start of 2018. The last published net asset value was 919p; the discount that the shares now trade on to this looks too wide, on any reasonable reading of the market.
MY ADVICE Buy
WHY Stability seems to have returned to the market. British Land, with its high proportion of retail space, seems as well placed as any in property
Conviviality
It has been an interesting year for Conviviality. In February the drinks wholesaler agreed to buy Matthew Clark, one of the biggest companies in the market, issuing shares to fund the deal at 150p. In December it had bought the much smaller Peppermint, which supplies drink to music festivals. Since April it has bolted on another one, Bibendum, the wine supplier, in a deal worth £60 million and requiring the issue of shares at 205p.
It is arguable how many of those deals were even on the skyline when Conviviality was floated in July 2013 at £1, but they make sense because wholesaling is one of those businesses that benefits from economies of scale.
The company has just increased again the expected synergies to be gained from Matthew Clark. It is often mistakenly taken for a retailer, but in fact the two chains it supplies, Bargain Booze and Wine Rack, are run by franchisees.
For investors, the important news, which sent the shares 18p higher to 196p, was the 14 per cent rise in the dividend. The shares now yield more than 6 per cent. I am not sure I would be buying, but that yield is worth hanging on for.
MY ADVICE Hold
WHY Dividend yield attractive, if shares are fair value
EnQuest
Times are hard in the North Sea. To the list of opportunistic deals in recent months, including last week’s purchase of assets by Faroe Petroleum, must be added the possible sale of EnQuest’s 20 per cent stake in the huge Kraken field east of the Shetlands to Delek, an Israeli energy conglomerate.
This year EnQuest picked up a 10.5 per cent stake in Kraken, one of the biggest projects under development there, for a song from First Oil, another struggling independent, which brought its total share in the field to 70.5 per cent.
EnQuest cannot afford the $600 million capital spending this year alone to take Kraken to first oil in 2017. If the deal happens, it gets the company off the hook. EnQuest had debt of $1.5 billion at the end of last year and Delek will bear its fair share of the necessary capital spending to bring Kraken to full production. The announcement has apparently been forced on the Israelis by an unrelated transaction taking place elsewhere. EnQuest, down ¼p to 29½p, needs to cut that debt because of the cost of the Alma/Gallia project in the North Sea.
Kraken will produce 50,000 barrels of oil a day when in full flow. EnQuest is producing about this from its other assets at present, which gives an idea of its importance. This is probably about the best result that could be expected but, as one analyst put it, the company is not yet out of the woods.
The best-capitalised oil explorers will come out best from this downturn, but I am not convinced EnQuest is one of them.
MY ADVICE Avoid
WHY Level of debt will still hold EnQuest back
And finally...
Ultra Electronics continues to build its American defence franchise with another contract win. The British company spent $265 million last year on an electronics warfare specialist. Yesterday it agreed to continue to provide a counter measure against torpedos for US navy ships and submarines. The contract could be worth $34 million over the next five years. Ultra will be one of the beneficiaries of the fall in sterling against the dollar, something that does not yet seem to be factored into the share price.
