At a time when retail landlords are coming unstuck from a surfeit of space on the high street, Shaftesbury has sought to push its unique quality as host of London’s West End entertainment.
To some extent, that’s a narrative investors had bought into up until last year’s crash. Unlike shopping centre landlords like Hammerson, or the group’s largest shareholder and fellow FTSE 250 constituent Capital & Counties, the shares had held steady since the Brexit referendum. Still, a share price total return of just 0.2 per cent in almost four years is hardly cause for celebration.
The devastation wrought by lockdown and international travel restrictions on footfall to shops, bars and restaurants has hammered rental collection rates and sent asset valuations plummeting. The shares trade at a 5 per cent discount to forecast net asset value at the end of September next year.
For investors contemplating whether the large discounts attached to shares in retail landlords constitute good value, the risk that you might be merely catching a falling knife is the biggest deterrent. So a 6 per cent rise in Shaftesbury’s net tangible asset value over the second half of the year, lifted by a 5 per cent rise in property values and stabilising rental values, will raise hopes that the portfolio has reached the bottom of its descent.
Weekend footfall to the West End is back at pre-pandemic levels and at 80 per cent during weekdays. The EPRA vacancy rate has fallen to 4.9 per cent of the portfolio by rental value, down from a peak of just under 12 per cent in March. New lettings over the six months to September were agreed at an average 0.7 per cent ahead of March values.
Almost all tenants are now on monthly rather than quarterly payment terms and the average length of new retail leases has shortened. There’s also an element of rent linked to many tenants’ turnover, at least in the first year or two of the term.
The shortfall in rent collection still stood at 20 per cent of the amount owed in October despite occupiers being permitted to trade free of restrictions. Some of the amount outstanding may need to be written off. Returning to 100 per cent should be achievable by the middle of next year, says Brian Bickell, chief executive. But the level of some rents have been cut over the past 18 months in return for tenants extending the term of the lease.
Eyes will now be on whether the emergence of a new variant of the virus results in a more severe tightening of international travel restrictions, which pushes back the return of overseas tourists in greater numbers to the West End.
The balance sheet looks steady enough. Raising a net £294 million of fresh capital in November last year removed short-term refinancing risk and meant it cancelled its nearest-maturity debt due to be repaid next year. Existing covenant waivers expire at the start of next year but management reckons there is no need to attempt to secure more. That seems fair enough because it could withstand a fall of up to 60 per cent in rental income and 39 per cent in valuations before breaching its covenant limits. But amid the severe disruption of the last two years, income fell by 34 per cent even after impairments, while valuations declined by just under 23 per cent.
There is the chance that further recovery in the rent collection rate and new leasing will spark a re-rating in the shares. But it’s an occupiers’ market and Shaftesbury is far from immune from the structural challenges facing retail and hospitality. A narrow discount versus NAV doesn’t constitute great value.
ADVICE Hold
WHY The discount attached to the shares is justified by uncertainty over recovery in rent collection rates and property values
Redde Northgate
Semiconductor shortages have hamstrung many manufacturing industries, but the commercial vehicle hire group Redde Northgate is making hay while a cloud hangs over the car manufacturing sector. The benefit of a production shortage in new vehicles to Redde Northgate is twofold: prices for any of the used vehicles it sells have risen, and the tightness in fleet availability has pushed up hire rates.
Pre-tax profit for this year is now expected to be “at least” in line with market consensus, prompting Peel Hunt to raise its earnings forecast for the current financial year by 4 per cent. That leaves shares trading at only 11 times forward earnings, even after a 12 per cent results-day rise.
Owning large fleets naturally carries the risk of rising rates of depreciation in a downturn. But for Redde Northgate, the shortage in car and van supply translated into a fourfold improvement in the average profit per unit on vehicle disposals to £924 over the six months to October, even if fewer motors were sold in favour of servicing rental demand.
Based upon current forecasts from the Society of Motor Manufacturers, management does not expect the supply/demand imbalance to fully correct for another two years.
The FTSE 250 constituent was formed via the merger of the claims management specialist Redde and fleet hire group Northgate last year. By offering a fuller range of accident and repair services, from roadside pick-up to claims handling, the group hopes not only to win more multi-year contracts with big-name insurance providers but also benefit from cross-selling.
Cost savings resulting from the merger of the two firms means management reckons it can sustain a higher rental margin of around 15 per cent. A leaner cost base has also helped boost the return on capital employed to 12.5 per cent, from 8.1 per cent last year.
The dividend is forecast to be back around its pre-pandemic level, too, with payment of 18.48p forecast by analysts this year, which would equate to a dividend yield of 4.2 per cent at the current share price. Neither the income potential nor impetus for further share price gains are reflected in the shares’ undemanding rating.
ADVICE Buy
WHY Vehicle shortages could drive the shares higher
