Companies are funded by investors with their hard-earned cash and are expected to invest it wisely to provide a better return than those investors would get elsewhere. Any cash handed back, then, by whatever means should be looked at very carefully.
Hansteen’s return of £580 million to investors, pretty much half its market capitalisation, looks unavoidable. This year the industrial property company was in receipt of an offer from Blackstone and another investor for its German and Dutch properties that was far too good to ignore.
The price settled on, €1.28 billion, was 6 per cent more than those properties had been in the books for at the end of last year. It was completed, conveniently, just before the end of Hansteen’s first half.
The company, historically, was only in the European market because, on its listing in 2005, the founders were contractually precluded from investing in the UK industrial market after the sale of their previous venture, Ashtenne. Since then a UK portfolio has been built up, while now is not a bad time, given the recovery in the eurozone economy, to be disinvesting there.
The problem is that UK industrial property is also much in demand, and not just those “big box” distribution units so favoured by internet retailers. It would be almost impossible to reinvest the net cash due from the disposal all at once and at decent prices while leaving it in the bank produces a cash drag on the company’s finances, given low interest rates. Investors should not be complaining. The shares, recommended here at 123p in March because of the potential for cash returns, lost 1½p to 137½p yesterday. Hansteen is proposing to buy back from investors one in every two of their shares, up to that £580 million proposed return, at 140p, a premium of almost 14 per cent over their price in March when the potential disposal was mooted and at a premium of 7p over the latest net asset value at the end of June.
That premium means that NAV figure will be diluted on completion, but that need bother no one who takes up the offer. The sale of those properties means Hansteen is almost entirely in the UK — there are some Continental odds and ends that will go in due course. It means dividends will have to be advanced to meet UK REIT rules which require a certain level of payout.
Take the cash and hang on to your remaining holding for the 4.3 per cent forward yield.
My advice Hold
Why The tender offer should be accepted as it offers good value to investors and a good use of the cash, while the forward yield is attractive
Wood Group
The deal by Wood Group to acquire Amec Foster Wheeler completes tomorrow with the shares in the merged company to start trading on Monday. Amec was of course brought low by the ill-timed acquisition of Foster Wheeler in 2014 before the oil price collapse and the debt it took on as a consequence.
A well-timed note from RBC Capital Markets runs the numbers on the combined group. Wood has already indicated annual cost savings of $170 million within three years from measures such as the closure of Amec’s London head office and relocation to its Aberdeen base.
What is of more interest is the revenue synergies, from cross-selling into Amec’s own clients and providing the latter’s services to its own. These are as yet unidentified, but Wood has adopted a more unified structure over the past couple of years which makes it easier to raise its offering to existing clients and this should bring benefits if spread across the group.
There is also the question of how Amec’s non-oil-and-gas activities would lessen the combined group’s reliance on that still declining sector. Its environment and infrastructure business grew by 7 per cent in the first half of this year and will gain from increased spending in the US on ageing assets there.
Wood’s share price has been in decline in the summer but has been perking up again since the end of August, up 5p at 700p last night. Any recovery in oil and gas cannot be relied on but on 12 times earnings the shares look a good long-term bet.
My advice Buy
Why As yet unquantified benefits of the merger
Gooch & Housego
When you are in the business of supplying growth areas such as laser-based satellite communications, fibreoptic undersea cables and 3D retina imaging, it may be difficult to keep up with demand. Gooch & Housego, which has ten manufacturing sites, six in the US, admits to being stretched at times. The company has doubled in size over the past five years, in part by means of small acquisitions, and is growing organically at a rate of about 15 per cent a year.
It makes optical components such as switches and modulators, including some that go into undersea fibre cables to boost the signal, where utmost reliability is paramount. A decade ago more than half went into consumer electronics but today Gooch gets a third of its business from aerospace and defence, on range finding and targeting technology, for example.
Yesterday’s trading statement showed the year-end order book ahead by almost 30 per cent year on year even disregarding currency effects. That pace of growth is reflected in a share price up by more than 40 per cent since the start of the year and another 26½p to £14.05 at yesterday’s close, and an earnings multiple of about 30. A terrific company but probably fully valued.
My advice Avoid
Why Strong growth prospects already in price
And finally...
The decision by Ultra Electronics to expand its US defence side with the purchase of Sparton Corporation, the second big deal there in recent years, increasingly looks like a good one. The company is one of those that likes to dribble out small contract wins on a regular basis and recent ones have been in India and the UK. The latest is a $16.2 million modification to an earlier contract with the US Navy, a key client in areas such as the provision of sonobuoys, to beef up cybersecurity.
