There’s not much to dislike in the business of owning and leasing out surgeries to GPs. The rental income is about as reliable as it gets — the NHS, which guarantees to reimburse doctors for their rents, doesn’t default — and the demographics are favourable — demand for primary healthcare is near infinite. The market is also fragmented and there is huge pressure to replace the remaining decrepit Victorian surgeries with modern, tailor-made premises. There’s even the nice warm feeling of investing in a business which helps do uncomplicated good.
Assura is one of the major players, a solid member of the FTSE 250 with a market value of £1.35 billion. It owns 525 premises, ranging from small surgeries to substantial medical centres and claims 6 per cent of the market. It develops new premises, acquires them (often from retiring GPs) and manages them, freeing medics from the distraction of keeping the roof watertight and the boiler maintained.
First-quarter figures out yesterday show the patient in good health, with the annualised rent roll rising from £91 million to £92.3 million in the past three months, driven mostly by acquisitions. Last November Assura raised £300 million at 57p and has been deploying the proceeds. Jonathan Murphy, chief executive, is confident for the full year.
Healthcare property is an attractive niche. Clients are sticky, rent defaults are unheard of, voids rare. Speculative development — the kinds of boomtime shock that can derail the office and retail sectors — is unknown. No one builds a new surgery without a tenant to fill it. The sector has delivered high yields with low volatility for the past decade.
But not all is perfect in this corner of the commercial property world: one rival, MedicX, recently cut its dividend because of concerns that it was paying out more than 100 per cent of its income. Expectations that interest rates in the UK are on the rise are also putting pressure on classic yield stocks such as Assura. And some investors seem to favour more aggressively acquisitive players with spicier balance sheets.
As a result, Assura, which once traded at a premium to net assets of as much as 25 per cent, now only commands a 9.2 per cent premium. Assura’s share price has drifted 10 per cent lower this year, closing yesterday at 57½p.
Assura has the advantage of scale. That helps in operations. Costs as a proportion of rental income have fallen from 20 per cent five years ago to 13 per cent. The Warrington-based company regards itself as highly efficient, employing only 50 people. It also helps in financing. Assura can borrow more cheaply because of its scale, the breadth of its assets and its relatively low debt to value ratio.
Healthcare property trusts are not bombproof. Assura itself collapsed by four fifths in 2007-08 because of a disastrous attempt to diversify into operating GPs’ surgeries. The 25 per cent fall in property valuations at that time didn’t help either.
There’s always political risk. Assura is dependent on one customer: it’s not impossible to envisage a future cash-strapped UK government turning the screws on suppliers to the NHS.
In the very long run there’s also demand risk. Virtual doctors and robots may one day be dispensing advice and care, though it is hard to see surgery visits declining any time soon. If anything, primary healthcare is seen as the solution to many of the NHS’s woes. A visit to the GP costs the taxpayer an average of £21, which compares with £124 for a visit to a hospital A&E department.
And there is money market risk. Assura has bond-like characteristics and would, like bonds, be clobbered if UK interest rates were to rise much faster than projected.
ADVICE Buy
WHY Stable, reliable income from player with scale to win
C&C Group
Mention C&C Group and the chances are that people will think of Magners cider — or, if they’re Irish, Bulmers. Yes, it makes cider — it also owns the Blackthorn, Ye Olde English and Addlestones brands in Britain, and Woodchuck and Hornsby’s in America — yet the Anglo-Irish drinks group has become much more than a cider maker.
When C&C floated in Dublin and London in 2004 it was a bit of a one-trick pony. Although it owned assets including Ballygowan water, Tayto crisps and Tullamore Dew Irish whiskey, the focus was on cider and in Britain Magners became a sensation as it pioneered the over-ice cider phenomenon.
The problem with one-trick ponies is that they can fall as quickly as they rise, especially when the dominant incumbent — in this case Scottish & Newcastle — responds with a rival product. To add insult to injury S&N, now owned by Heineken, used the Bulmers brand to lead its over-ice riposte, pitting the UK Bulmers against the owner of the Irish Bulmers.
In 2008, a nasty cocktail of competition, dire weather and a consumer slowdown sparked a series of profit warnings and a trio of former S&N executives, including Stephen Glancey, now the chief executive, were parachuted in to take over. A saving grace for C&C was and remains its strong cashflow and when non-core businesses, such as soft drinks and spirits, were sold it gave them the resources to buy Tennent’s lager and Gaymers cider while moving into wholesaling.
To address C&C’s weak route to market for its drink products in England and Wales, in September it teamed up with a private equity firm to buy Admiral Taverns, the owner of 850 tenanted pubs, for £220 million. Then in April it acquired the Matthew Clark and Bibendum wholesale businesses from the ashes of Conviviality by assuming liabilities of £102 million.
All of which has created a much more well-rounded and highly cash-generative drinks group. The group said that the combination of the heatwave and the World Cup had boosted trading in all its markets, with Bulmers in Ireland returning to “moderate” volume growth.
ADVICE Buy
WHY The shares, up 2 per cent to €3.38, have yet to reflect the benefits of recent deals
