Coronavirus put the kibosh on the annual tradition of freshers’ week parties, but Unite Group is still nursing a hangover.
Not only did the UK’s biggest provider of student accommodation lose out financially last year after waiving rents over the summer, but it faces pressure on revenues this year after promising tenants a 50 per cent discount in the latest lockdown.
If the persistence of the pandemic prevents undergraduates and others from physically going into college or university for another term, it’s hard to imagine it not feeling compelled to do the same thing again.
Meanwhile, the crisis depressed valuations across its property portfolio, marked down last year as a result of lost rental revenues and the emergency stamp duty holiday. The group’s shares, which had enjoyed an almost relentless upward march to last February, have since lost a quarter of their value.
Could a dynamic company that looked set to be awarded a first class degree by shareholders now be at risk of scraping through with a third?
Founded in 1991, Unite Group rents rooms to students, both directly and through universities, specialising in those attending the elite Russell Group institutions in cities such as Cambridge, Durham, Edinburgh and Bristol. It provides homes to 75,000 students living in 177 properties in 27 towns and cities and operates at the premium end of the market, offering perks such as free wifi and coffee.
Before the pandemic, Unite Group was posting double-digit increases in revenues and profits and lifting the dividend. It was also in acquisition mode, buying Liberty Living’s 24,000 bed portfolio for about £1.4 billion.
The company was quick to respond to the impact of Covid-19 on its student population, deciding in late March — two days after the first lockdown began — to waive rents for students who decided to return home for the rest of the academic year.
It is testament to Unite’s financial flexibility that it said it would almost entirely recoup the £90 million to £125 million in lost cashflow through deferring developments and non-essential spending and cutting costs.
Rather than draw on the government’s emergency credit facility, the group turned in June to shareholders and raised £300 million in a modestly discounted placing. Instead of needing the capital to shore up its balance sheet, the company said it would use it to continue to invest in new development schemes, in November buying an 800-bed site in Paddington in London.
Although the Liberty Living acquisition helped to increase the rent roll over the six months to the end of June, a £138.4 million drop in the property valuation pushed Unite into a statutory pre-tax loss of £73.9 million over the period.
Analysts at Numis still expect the company to make a profit for last year of about £90 million and for annual earnings to be above their pre-Covid level during the current financial year. The dividend, suspended last year, is also expected to return during 2021.
The truth is that, while the pandemic has been a serious disruption for Unite, and the students it serves, the company has coped with the problems well.
On the assumption that over the coming months the UK will start to emerge from the tortures of coronavirus, the investment case for Unite Group still stands. It provides high-quality accommodation to a student base that shows little signs of contracting. Its valuations should grow again once normality resumes.
The shares, down 31p, or 3.1 per cent, to 962½p yesterday are not cheap, trading at 32.5 times Numis’s forecast earnings for a prospective dividend yield this year of 2.3 per cent. But they are worth it.
ADVICE Hold
WHYGoing great guns but shares richly priced
Avon Rubber
No company that makes face masks is likely to have suffered a drop in orders over the past 12 months.
While Avon Rubber does not supply the personal protection equipment worn by frontline healthcare workers, it does make headgear and respiratory masks for the police, fire brigade and military.
So, with emergency response agencies and the armed forces even more mindful of the need for protection during the pandemic, the demand for new and replacement gear and parts from the FTSE 250 business surged last year.
Orders received over the 12 months to the end of September rose by 23.9 per cent to £160.8 million and forward orders likely to be fulfilled in the year ahead increased by 117.4 per cent to £79.8 million.
Yet 2020 was not just about rising revenues for Avon Rubber: the group sold off its dairy division, made a sizeable acquisition, cut debts and replenished the coffers of its pension fund as well. No surprise, then, that its shares increased in value by more than a fifth over the 12 months.
Avon Rubber was set up in Wiltshire in 1885 and, until last year, operated two divisions, one making respiratory protection equipment for the emergency services and military, and the other making rubber tubing and liners for the dairy industry.
In July, the company sold off the Milkrite unit to a trade buyer for a net £160 million in cash, comfortably higher than analysts had expected. The proceeds went into paying off debts, repairing the pension scheme and helped fund its acquisition in September of Team Wendy, which makes helmets, for £100 million.
After a busy period, the group promised shareholders that this year would be quieter. It was not an auspicious start, however, as Avon Rubber said in early December that a contract to supply bullet proof vests to the US military had been delayed because of a failure in late-stage testing. It cut profit expectations for this year, but the contract’s revenues are delayed, not cancelled.
Its shares, down 45p or 1.3 per cent to £34.20 have been weaker since, which seems unwarranted, but the stock is valued at 24.5 times Investec’s forecast earnings for a dividend yield of about 1.3 per cent.
ADVICE Hold
WHYGoing great guns but shares richly priced
