The next set of interim results from the big property companies are going to make interesting reading. Many, including British Land, Land Securities and Great Portland Estates, have March financial year ends. This means that their valuers will have to draw up their views on the worth of their portfolios at the end of September. It is going to be difficult, given all the uncertainty over the summer, to take a view on those values.
Most likely there is going to be a lot of guesswork and much prevarication. Great Portland is the first of the big property groups to produce a trading update since the EU referendum, and a degree of caution is already evident. The company is entirely exposed to the London market, with 76 per cent of it in the West End and a quarter in retail.
So far there have been indications of interest from overseas buyers for prime property, attracted by low sterling and the hope that there will be bargains out there. Great Portland was understandably emphasising its defensive properties yesterday, even if the company has in recent years been among the most bullish about the prime London market.
It has eight schemes committed to complete by the end of next year, at a cost of £210 million. The cash and borrowings are there for this, and 62 per cent of this space is pre-let or pre-sold. Thereafter it can turn off the tap, keeping existing properties producing rental income but not developing them, as happened in 2009. The company has a low loan-to-value ratio of below 20 per cent. New lettings were continuing apace in the first quarter, albeit ahead of the referendum vote.
The prime property sector has been one of those worst hit in the market turmoil of the past fortnight. The sector had a bounce yesterday, for reasons that were not entirely obvious. Great Portland shares, above 770p two weeks ago, added 22½p to 585½p. This is a long way below the 847p net asset value published at the end of March.
I have no idea what will happen to the London property market. The worst-case scenario is if big multinationals start ostentatiously to abandon plans to come to London. A brave investor might take the plunge, in which case Great Portland is a good candidate. I would not.
My advice Avoid
Why? Discount to net assets is still low and the shares are a speculative punt on London market but uncertainties are worryingly strong
Associated British Foods
Sometimes I despair. Shares in Associated British Foods tumbled from above £28 after the referendum vote, mainly, one assumes, on fears that its Primark chain, which sources from outside the UK, would have its margins eroded by the lower pound.
They bounced 227p to £27.80 after ABF pointed out that the low pound would actually be a considerable benefit — something that should have been blindingly obvious to all. ABF gets half its profit from outside the UK. Its British Sugar business has its costs in sterling and its revenue and earnings in dollars, so the translation effect is considerable.
It has businesses in Australia and South Africa, where the currencies have also strengthened against the pound. ABF has just bought out the minority stake in Illovo Sugar of South Africa at the sterling rate which prevailed before the vote.
As to Primark, there will be margin erosion in the UK but half the business, and growing, is on the Continent. The other potential downside is lower consumer spending in both regions, but given where Primark is in the market, it seems as well placed as any.
Meanwhile the sugar price, in euros, is rising because of tighter production. The consequence is that ABF, which had been expected to report lower earnings in the year to end-September, will now report an increase, with the effect of low sterling continuing thereafter. They sell on an earnings multiple in the mid-20s, which reflects Primark’s valuation, but still seem good long term.
My advice Buy
Why? Benefits of low pound as yet unappreciated
Robert Walters
If you wanted to find a sector likely to be affected by looming economic uncertainty, you could start with headhunters. Their shares have been on the slide for a while now because uncertainty means that senior executives are less likely to want to change jobs and employers less likely to hire. They have fallen sharply over the past couple of weeks.
Robert Walters is at the top end of the market; by one analysis, it could do worse if UK companies are less likely to make expensive hires. On the other hand, more than two thirds of income is outside the UK, and most of the growth is coming in Asia-Pacific, where it is active in growth markets such as Thailand, Vietnam, China and, more recently, the Philippines.
The company also has a growing business in the UK, Resource Solutions, which offers outsourced hiring to HR departments and should grow no matter what happens elsewhere. Fees were up by 16 per cent in the second quarter to the end of June. The shares, up 14p at 269p, sell on almost 13 times earnings. Recruiters still look vulnerable to the unknowns out there, and I am not sure I would be buying now.
My advice Avoid
Why? Too early to be going back into recruiters
And finally ...
We previously came across NCC Group last autumn when the company was investing heavily in a Dutch cyber-security business, and raising fresh cash at 275p per share to fund the deal. I advised taking profits and the shares are little changed today after a strong set of results showing organic revenue growth of 19 per cent. If anything, the problem of cybersecurity has become more pressing since, and the Dutch acquisition begins a global rollout this year. NCC has, unusually for its type, a good record on dividends.
