If you are looking to buy a few shops, or perhaps a small shopping centre, or even, say, a town centre in Edmonton Green in north London, look no further than St Modwen Properties.
The FTSE 250 regeneration specialist is on a selling spree and, frankly, it could not come soon enough. Until the start of last year, the company had languished as a property business with an erratic and sprawling portfolio that did not make a lot of sense. It had specialised in buying land that no one else wanted to develop, such as old oil refineries or steelworks, and turning them into huge sites of offices, shops and retail.
It also held a 15-year-long landbank but no real housebuilding business to speak of, small retail assets that were not generating much income, and town centres that were returning little more than £5 million in rent, such as Edmonton — yours for £70 million, if you are interested.
Mark Allan, the former chief executive of Unite, the student accommodation provider, came in and changed all that. He decided that St Modwen would continue to take on regeneration sites but the focus would be housebuilding and industrial and logistics centres. Almost everything else could go. It was a bold move and has pleased investors it seems. The share price since Mr Allan arrived in December 2016 is up to 404p from 303p.
The group’s interim results show its strategy is going well. The company has sold £350 million of assets, including £95 million of retail, taking disposals since the strategy was announced last year to £635 million, representing 35 per cent of St Modwen’s portfolio. Yes, some of the retail assets are selling 4 per cent below November 2017’s book value but in this climate that should not be considered a bad run.
The returns from selling properties are also showing big gains for the company. Take the £95 million of retail and £139 million of student accommodation in Swansea the group sold in the first half of the year. This was delivering a net rental income of about £10 million a year.
The group has invested half the proceeds from these sales — about £110 million — in its logistics and industrial pipeline and is set for an income of £11 million a year. Scale that up to £500 million of capital being recycled and that translates into a big move on earnings and, by extension, the dividend over the next two to three years.
In the past, a lot of cash generated by St Modwen was development profits, as the company sold all that it developed. Now it will hold on to assets that generate an income and link the dividend to the recurring cashflow from this activity and housebuilding profits. This means, as income increases, dividends should rise more strongly. St Modwen reported a 53.5 per cent increase in the dividend to 3.1p per share, up from 2.02p a year earlier.
The cash from these disposals is enabling the management to pursue an ambitious development strategy of boosting its residential and logistics divisions by 25 per cent a year, while keeping debt at a low level, at 24.2 per cent loan to value in the first half.
The shares dipped 4 per cent to 404p after the company revealed profits were down 18 per cent to £25.9 million and earnings per share fell 22 per cent to 9.4p, although net asset value per share rose by 1 per cent to 455.4p. The company expects profits to be up on the year with the interim fall due to the winding down of a joint venture with Persimmon.
The total return for the half year was 2 per cent but is expected to be 6 per cent for the full year. St Modwen wants that to rise to between 10 per cent and 11 per cent within three years and that means a big boost in dividends. With shares at a 16 per cent discount to November 2019’s NAV, this is worth a buy.
ADVICE Buy
WHY Sensible disposal strategy is performing well and will boost dividends over a three-year horizon
McBride
As profit warnings go, yesterday’s alert from McBride was pretty gentle. The Manchester-based company was founded in 1927 and produces the goods, from dishwasher tablets, fabric conditioners and hairsprays, that retailers across Europe sell to their customers as own-brand products.
A variety of moving parts, most notably a tough retailing market in France offset by a stronger-than-expected performance in Germany, meant that annual pre-tax profits are going to be “marginally” below the lower end of forecasts, McBride said.
That means somewhere below £31 million, down from the previous year’s £34.6 million, and analysts are not predicting profits above £40 million until its 2020 financial year. The shares fell 6p to 126p and have lost close to 36 per cent of their value since January, when McBride issued a profits warning, effectively saying annual earnings would be flat against last year. This seems harsh. McBride is in the thick of a transformation period put in place by an executive team installed more than three years ago.
It counts as customers the vast majority of Europe’s supermarket retailers, including the discount chains, but has been simplifying itself after concluding it was making too many versions of too many products.
About four fifths of its business consists of making “white label” household goods — washing-up liquids, detergents and the like — with the remainder in personal care products, such as shampoos, creams and shaving foams. McBride has been filleting through some of its personal care offerings and yesterday offloaded its loss-making liquids business for £12.5 million.
To make a success of white labelling, you need scale and McBride has it, but it is exposed to ingredients costs, the fortunes of the retailing sector and consumer confidence. As a supplier it also faces being squeezed as supermarkets flex their muscles — witness the tie-up between Tesco and Carrefour of France, which might mean bigger contracts if they buy together but will probably come at the expense of profit margin. McBride is going in the right direction and the shares are worth holding.
ADVICE Hold
WHY It has the scale to succeed and the end of its transformation plan is in sight
