Interactive Investor

Stockwatch: Profit from Brexit uncertainty

7th June 2016 10:35

Edmond Jackson from interactive investor

Has London commercial property topped out, or may offer further upside? The five-year chart for £460 million investor and developer Helical Bar epitomises the strong run and recent doubts: after soaring from 165p in 2012 to 470p by end-2015, it then dropped to 360p and is currently 395p.

Helical's management cites "concerns over global economic issues and the EU referendum" affecting property stocks, although profit-taking seems inevitable after years of loose monetary policy have boosted property values in major cities. Assuming the EU Referendum weighs to 'Remain' and the global economy keep muddling through, London is likely to stay prosperous, however a tilt to Brexit could lead businesses to reconsider their location priorities.

So, there's a risk the market is checked by a degree of stalling, both on new office developments and investments. Yet Helical's view of its positioning in the London market implies it could ultimately take a 'Leave' vote on 23 June in its stride. In the near term, deciding to Remain is likely to prompt a relief rise in stocks like this.

Asset growth robust

Helical trades at a 15% discount to its industry-standard net asset value of 461p per share at end-March, projected to rise to 561p in two years, and a 27% discount to the 12-months forward scenario. This largely reflects existing projects and is the chief benchmark for value since earnings can vary due to project timing/sales.

The medium-term context is Helical's management saying nearly three years ago (when I drew attention at 300p) they were "on the cusp of returning to delivering out-performance", which is affirmed by the table of results from 2014 onwards.

The portfolio is 75% investment-weighted versus 25% development focused, where exceptional profits can be achieved; this is also reflected in the way London has accounted for 80% of £170.6 million total property returns in the last financial year, albeit 56% of the total investment portfolio.

Certainly, Helical is exposed to sentiment swings towards commercial property in the capital, but don't overlook how the management has achieved a strong underlying momentum.

Record year for Helical

Prelims to end-March reflect a record year across performance measures, with profit enhanced by completing and letting offices. The breakdown reflects how lumpy profits can get in this business, especially property sales.

Net rental income is up 12% to £43.4 million and development profits have grown 56% to £27.5 million (although they were £65 million in 2013/14). Revaluation of investment properties contributed £55.8 million (£93.0 million in 2014/15) and there was also a £43.9 million gain in profit from investment property sales, up substantially from £3.6 million.

"These results clearly demonstrate that our strategy of targeting London for capital growth and development profits and the regions for higher-yielding investment assets provides the most appropriate allocation of resources to enable us to meet our long-term objectives."

The variability of profit sources explains the lower profits/earnings anticipated in the years to end-March 2018 despite net asset per share advancing usefully. Debt is being employed to achieve this: the end-March balance sheet shows long-term borrowings up by a third to £733.2 million, partly as £45.4 million short-term debt was nearly eliminated. Factoring in £74.7 million cash, this makes for net gearing of 135.6%. Service cost clipped 13.1% of last year's operating profit and is likely to take more in the current year.

It is probably fair to capitalise on opportunities presented by the London market currently, yet it rather typifies a mature property cycle when corporate debt rises after a period of strong growth. While gross rents rose to £23.6 million, on a marked to market basis (i.e. reflecting current market values) the estimated rental value soars to £45.4 million and management reckons this could hit £81 million in three years.

New non-exec jumps in (lightly)

Directors are expected to own shares and a £40k purchase is not exactly backing the farm; but it's decent outlay straight after prelims so ought to reflect belief in value. This new director has plenty of experience in the industry hence should regard it judiciously.

As yet there have been no director/senior manager sellers once out the restricted period on dealings, i.e. management do not share the market's fears. The "retiring" chief executive owns 10.7% of Helical's equity and the current chairman 2.4%.

I use inverted commas because the CEO is to become non-executive chairman after running the company for nearly 32 years, which goes against guidelines that non-executive directors should be independent rather than having longstanding managerial ties.

But given his track record of taking the business from an £800,000 market capitalisation in 1984 with a share price of 1.0p, his perspectives on the property business and capable overseeing of management is undoubtedly a proven factor. The chief executive designate has been a director since 1994, jointly responsible for development, hence is well-proven in the company.

EU referendum may dictate short-term

If the public continues to tire of Remain's negative campaigning and sentiment hardens against immigration in the next fortnight, a Leave vote is liable to hit stocks like this initially, given the uncertainties for London as an international business centre. But this could constitute a buying opportunity ahead of a more considered view - also in respect of Helical's underlying momentum.

A Remain vote is likely to trigger a relief rise in this and other property stocks given the uncertainties that have festered in recent months. On balance, I still think Remain is the more likely outcome hence Helical - with its London expertise - is worth bearing in mind to buy on 24 June and thereafter.

For more information, click here.

Helical Bar - financial summaryConsensus estimates
year ended 31 Mar2012201320142015201620172018
Turnover (£ million)5365.412410666.4  
IFRS3 pre-tax profit (£m)7.4510287.4120  
Normalised pre-tax profit (£m)7.4510287.4 2428.1
Operating margin (%)25.7-14.979.279.4   
IFRS3 earnings/share (p)6.5573.260.892.6  
Normalised earnings/share (p)6.5573.260.892.612.318.5
Price/earnings multiple (x)   6.4   
Cash flow/share (p)6.30.246.1-1.7   
Capex/share (p)0.10.20.51.6   
Dividends per share (p)4.95.35.76.97.58.29
Yield (%)    1.92.12.3
Covered by earnings (x)1.3113.29.412.41.52.1
Net tangible assets per share (p)215215288342 518561
Source: Company REFS

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.