Mike Ashley is a man who likes to surprise the City. Last week he did just that when this paper revealed that Frasers Group, his retail empire, had thrown its hat into the ring for the Meadowhall shopping centre in Sheffield.
It wouldn’t be the first acquisition of this sort — the company bought two shopping centres last year, The Mall in Luton and the Overgate centre in Dundee — but Ashley’s latest and biggest punt on retail property will have left investors scratching their heads again about what Frasers’ “end game” might be.
Michael Murray, Ashley’s son-in-law and the chief executive of the retailer, said that shopping centres provided the group with an opportunity to “go in, put Frasers in — in the right size — an elevated Sports Direct, bring in Flannels, bring in an Everlast gym and really repurpose it with our own occupational requirements”. That would be a good strategy if the physical trading environment wasn’t so uncertain.
It is no secret that shopping centres have struggled to attract the levels of customer visits recorded in their heyday, predominantly because of online shopping. Centres such as Meadowhall (or “Meadow-hell”, as some locals like to call it) really could do with being modernised to attract more shoppers, which will require a hefty cash injection. A safer bet would have been to stick with out-of-town retail parks, where the likes of Next, the clothing and homewares chain, have been flourishing.
Ashley’s patchwork approach to mergers and acquisitions can be seen, too, in the group’s recent stake-building spree. Frasers has been incrementally increasing shares in struggling online retailers, including Asos, Boohoo and AO World. It is betting on a revival in the fortunes those companies, which thrived during lockdowns but have struggled since then amid the cost of living crisis. That bet is looking less and less likely to pay off as sales of fast-fashion and big-ticket items such as fridge freezers continue to dwindle.
Having a diverse portfolio, however, seems otherwise to be working in Frasers’ favour. Total revenue for the group, including Sports Direct and House of Fraser, rose by 4 per cent to £2.8 billion the half-year to October. Pre-tax profits beat expectations, rising by 8 per cent to £310.2 million in the period, up from £285.6 million. That is reflected in the share price, which has delivered a resilient performance in recent years.
The range of brands and investments means that if some categories struggle, others are able to prop up the business. Take the luxury sector, for example: Frasers Group has been investing in its premium offering with Flannels. It is a strategy that no doubt should benefit it in the long run, but for now the entire global sector is squeezed. Revenue in the group’s “premium lifestyle” division, which includes the luxury Flannels chain and the House of Fraser and Frasers department stores, declined by 11.2 per cent in the six months to the end of October, excluding acquisitions and disposals amid the wider slowdown in luxury.
In the meantime, the sportswear division has been pillowing revenue. Murray said the standout brand had been Sports Direct, “which has probably the most momentum I’ve ever seen it have in the time I’ve been here”. The sportswear chain has been boosted by Frasers’ “elevation” strategy to improve and refurbish the group’s store estate in an attempt to woo more upmarket brands into allowing the retailer to stock their products.
That said, with the right retail proposition, it provides a constant income stream from other brands operating in those spaces. Revenue from property increased by 124 per cent £31.4 million the six months to the end of October.
For now, the retailer can afford to keep playing around with new mergers and acquisitions. It had £267 million in cash alone on the balance sheet at the end of October. It is also not overstretched: net debt stood at £498 million at the end of the period.
However, its shares trade at only nine times forwards earnings, right towards the bottom end of the long-term range. This is a case where there is not enough reason to buy new shares in the business, but just enough growth potential for investors to hold on.
Advice: Hold
Why: Uncertainty over property investment and stake-building strategy
Crest Nicholson
Crest Nicholson looks like it may be extending its spell at the bottom of the league table for listed housebuilders (Helen Cahill writes).
Three years ago the FTSE 250 construction group set itself ambitious growth and cost-cutting targets to bolster its ailing share price. The shares peaked at 458p as investors bought into its vision of bringing operating margins in line with its peers and boosting its return on capital to at least 22 per cent. Crest Nicholson promised to do all this by pulling back on the kind of complicated projects that take longer to build and can be subject to cost overruns. It also aimed to standardise the specifications for its housing units to reduce overheads and deliver more sales.
It turns out Crest Nicholson chose the wrong moment to set such ambitious targets. It made those promises when the economy was comingback to life after the pandemic, but since then the Bank of England has put the brakes on the housing market with interest rate rises. Crest Nicholson’s directors had hoped to lift the operating margin closer to the industry standard of between 18 per cent and 20 per cent, but instead the group’s margins have dipped below 7 per cent. Meanwhile, the return on capital is less than 4 per cent.
Analysts are now looking out for any negative news on the value of Crest Nicholson’s land bank and on the funds it must set aside forfixing flats wrapped in flammable cladding.
Housebuilders size up the value of their land holdings when they build a development and they write down the value of these assets if the homes prove to be less profitable than expected. Crest Nicholson is particularly exposedto rising interest rates as it focuses on southeast England. Buyers were already struggling to afford homes in the region before an increase in base ratesand their budgets are now being stretched still further. Housebuilders who bought land in the region when the market was booming may well be disappointed by the prices that land for homes can fetch now. Crest Nicholson’s shares trade at a 38 per cent discount to the forecast book value owing to the potential for further writedowns, a larger discount than any other peers in the sector.
Crest Nicholson also doesn’t know how much it will need to pay to repair cladding defects on its buildings. The builder has yet to work out whether remediation is required on 152 sites, having set aside £145 million already. Peter Truscott resigned as its chief executive this week and investors may not know the full liability until Martyn Clark, who is moving from Persimmon to take on the role, has made his own assessment.
ADVICE: Avoid
WHY: The housebuilder risks further pain from cladding and land value woes
