Something very odd happened in the property market in June as real estate companies were required to get quarterly valuations of their assets. Come the end of June, the startling outcome of the referendum vote put all those numbers up in the air.
The prices of the quoted housebuilders plummeted, offering a significant buying opportunity. Property valuers threw their hands up in the air, saying they couldn’t possibly value the assets because of the uncertainty. They then put in some strong caveats in their valuations.
One of the companies affected was Ediston Property Investment Company, highlighted this week. Its valuer, Knight Frank, took the view that with the Brexit vote only a few days beforehand, there was insufficient certainty to produce a useful number. There was talk at the time that property values could fall by as much as 10 per cent as a consequence of the vote.
As it turns out, the trust’s latest valuation at the end of September indicates little damage to asset values over the past three months. There have been sufficient transactions in the property market to allow Knight Frank to lift that caveat. In the event, the net asset value of the trust fell by just 0.67 per cent, a mere blip.
This meant that the trust, including dividend payments, made a 0.61 per cent return over the quarter. Ediston was floated two years ago. It is unusual in paying monthly dividends, which was deemed to be attractive to income funds investing at the time. Those dividends, running at 0.4583p a month, are fully covered by earnings.
This, on an annualised basis, provides a dividend yield of 5.3 per cent. Ediston is not exposed to the central London market, which has borne the brunt of the post-Brexit fall in values. It has invested in a range of 37 projects around the country, with a little more than half the portfolio in offices and the bulk of the rest in retail warehouses.
These are assets that can be expected to hold their value on any rational reading of the economic runes. The void rate is just 4.7 per cent, and the loan-to-value ratio is below 30 per cent. The trust has ambitious plans to double in size; this will require further issue of equity but that dividend yield looks safe enough.
MY ADVICE Buy
WHY The trust is in the right part of the property market, with little exposure to the southeast, and the yield on the shares is an attractive one
McBride
McBride, which some may remember from its stock market float two decades ago, has been suffering of late from its position supplying white-label goods to the big supermarkets. The company has been retreating from some less profitable business over the past couple of years but faces some difficult headwinds.
It gets about three quarters of revenues from outside the UK, so the lower pound is an advantage. On the other hand, the higher cost of importing raw goods is a negative. The company announced a good start to the financial year at its annual meeting yesterday, although revenues in constant currency terms were down by 2.9 per cent, reflecting price deflation on the Continent, probably mainly France. Against this, that new strategy is paying dividends in terms of the cost base and margins.
There should have been few real surprises, given that McBride published its results little more than a month ago. The shares have been a strong market this year, reflecting the management’s moves to reposition the business. At 192½p they sell on nearly 15 times earnings. That multiple looks a full one.
MY ADVICE Avoid
WHY The earnings multiple looks full enough for now
Cobham
Like Senior the other day, it has all gone horribly wrong for Cobham, the aerospace engineer. There is a hiatus in management, with a new chief executive arriving next year. The latest profit warning may highlight the difficulties with the KC-46 Boeing tanker but it makes it clear that the problems spread across the group. Some wonder if the £900 million purchase of Aeroflex in 2014, which has nothing to do with that Boeing contract, was a step too far, and wildly overpriced at that.
For investors, the main concern is the dividend. Bob Murphy, the departing chief executive, confirmed that this would be maintained for 2016. This makes no sense whatsoever; Cobham was required to raise £500 million in June to cut debt, part of it run up with the Aeroflex deal, while those dividend payments this year will mean £126 million out of the door. That rights issue means the dividend for this year falls to 7.4p. The yield on the shares, then, off 21p at 139¾p, is 5.5 per cent but this can hardly be relied upon and there is every likelihood that the incoming chief executive, David Lockwood, will cut the payment. The debt, the reason for the rights issue, is climbing again, about 2.6 times earnings. The company’s covenants require it to remain at 3.5 times or below, and it is conceivable that new management may decide to issue further equity. The shares sell on 11 times earnings.
What with that falling dividend, the problems across the group and that possible rights issue, it is hard to find a justification for holding them.
MY ADVICE Sell
WHY It is hard to believe that the worst is over
And finally
This column has suggested before that the market has failed to appreciate the changes coming for Icap once the sale of its voice-broking business to Tullett Prebon completes at the end of the year. There is a parallel here with the London Stock Exchange, which now sees most of its profits come from post-trade operations.
A note from Exane BNP Paribas points out this disjunct; Icap’s
post-trade activities can only continue to grow as regulatory pressures force more clearing business towards them.
