Grainger appears to be another of those niche property companies that have both strong growth prospects and a relative immunity to whatever the market throws at it. The stock market seems to be taking a long time to appreciate this, though.
The shares are still where they were halfway through last year. During the intervening period Grainger has announced a complete change of direction and gone a long way towards achieving it.
The company was known as the UK’s biggest private landlord, holding homes on controlled rents and taking the income until the properties were vacated for whatever reason and then selling them for a profit. At the start of the year Helen Gordon, the new chief executive, announced details of an aggressive move into the private rental market, planning to spend £850 million on building and acquiring new blocks of housing.
As at the September year end, £389 million had been spent and another £347 million was in the planning or legal process. Not all of this will be completed, but it is plain that the target will be reached. In all, £500 million has been raised through sales of non-core assets to take the pressure off debt and allow investments to be made.
Sales of the legacy-regulated rental properties are chugging along at about £100 million a year, at a good premium to their value on the books. By 2020 about half the portfolio will be new rental property and half those legacy assets.
The significance for investors is that Grainger, as part of its new business plan, has pledged to pay out half its rental income in dividends. That income was £37.4 million; dividends were increased by 64 per cent to 4.5p a share. This means the historic yield on the shares, off 9¾p at 215½p, is 2.1 per cent.
Analysts expect rental income to grow to perhaps £75 million by 2020 as its investments come through, and the yield will rise accordingly. Alternatively, and more likely, the shares will rise so the gap between net assets, now 287p, and the share price narrows. That discount to net assets looks hard to understand, given the prospects for the rental market. Either way the shares look like a buy.
My advice Buy
Why Investment plans will boost rental income which will be distributed to investors, while discount to net assets looks too wide
Serco
Serco is one of those cases where, had you had the courage to get in when things looked at their darkest, you would have done very well indeed. The outsourcer seems to have avoided the woes of its peers, such as Mitie, Interserve and Capita, and continues to build its workload while extracting itself from earlier onerous contracts.
As a result the company has raised its guidance on revenues and profits twice this year and has reiterated those forecasts again at a capital markets day for City investors. There is a degree of caution over next year; the figures could go either way because any unexpected changes to revenues and costs would have a disproportionate effect. In any event, the exit of some of that work will mean that the numbers will inevitably be lower and will not match a strong performance in the first half.
Serco shares bottomed out below 80p in February. Investors had had to put their hands in their pockets for a rescue rights issue the previous spring at 101p. The shares, off ½ p at 132½p, now sell on 44 times next year’s earnings, which is the multiple that matters. That does not suggest much upside.
My advice Avoid
Why Shares are selling on high multiple for next year
McColl’s Retail Group
Sometimes you make your own luck. In July, McColl’s Retail Group agreed to pay £117 million for 298 convenience stores being offloaded by the Co-op as part of the mutual’s turnaround plan. The company was the obvious buyer and the deal allowed it to accelerate the expansion of its convenience store side, under which it is gradually converting part of the old chain of newsagents and buying individual outlets.
The purchase price was the equivalent of about five years of those shop acquisitions.
It was a truly transformational deal that could not have been envisaged when McColl’s floated in early 2014 at 191p. It needs the clearance of the Competition & Markets Authority, probably before Christmas, though this should not be a problem.
The latest trading update is an indication why those convenience stores are the key to future performance, even as the number of newsagents that can be converted is slackening off. Recently acquired and converted stores reported like-for-like sales up by 0.8 per cent, good enough in a difficult market; the existing ones and newsagents were in negative territory. Across the group, like-for-likes were down by 1.7 per cent in the fourth quarter, an improvement on both the previous quarters but reflecting that difficult market. McColl’s shares have outperformed the sector as a whole but are still sitting, unchanged at 175p, at below the float price. The main attractions are that Co-op deal and a 5.9 per cent dividend yield.
My advice Buy
Why Prospects for growth and good dividend yield
And finally . . .
Clipper Logistics looks like the float that got away. Largely unnoticed in 2014, the shares made their debut at 100p. They now sit at 365p. The company continues to add to the number of retailers whose internet orders it services, with a deepening relationship with John Lewis, and is expanding into the Continent. The interim dividend is up by 20 per cent, though that share price rise means the yield is less impressive, while the earnings multiple is heading for 30. Mind you, those investors who bought in at the start will not be complaining.
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