There was an eclectic mix of property companies to feature in the top price movers for September. Top of the tree was private rented sector and residential development specialist Sigma Capital Group, with a 34.2% rise. The group launched a £1bn joint venture with EQT Real Estate, the real estate platform of global investment firm EQT, to deliver 3,000 private rental homes in Greater London. Micro-cap investor Panther Securities also hit double-digit gains, while Macau Property Opportunities saw an uplift in its share price after announcing debt refinancing and a disposal. CLS Holdings, the investor in offices in Germany, France and the UK, continued to see a recovery in its share price – which has risen 15.1% in the last three months. Off the back of solid results, Berlin residential landlord Phoenix Spree Deutschland saw its share price gain 7.2%. Schroder REIT’s share price rose 6.6% in the month as it embarked on a share buyback programme, while Irish commercial property investor Yew Grove REIT also saw positive shareholder reaction to amending its investment strategy to increase its target loan to value ratio to 40%.
Companies: SUPR DIGS CRC PSDL ASEI TPON RLE UKCM BREI BCPT RGL SIR SLI TOWN CAL
Commercial property investors have experienced a wildly volatile few months and the outlook is still extremely uncertain too, thanks to the government response to the coronavirus outbreak. Many investment companies have cut or cancelled their dividends; and the pace and scope of the lockdown lifting will affect how quickly and to what extent their rental income recovers. As a result, they sit on wide discounts to NAV. On the other hand, other areas of the property market have seen limited or no effect. Some of these alternative sectors have seen their share prices fall and rise dramatically, close to their pre-crisis valuations.
Companies: BREI RESI THRL BBOX SHED
BMO Real Estate Investments (BREI) owns a portfolio of UK commercial property with strong biases to the industrials sector and the South East of England. The former has been the most resilient sector in the current crisis, while the latter is the economic engine of the country. The manager, Peter Lowe, considers his approach a quality strategy, and he aims to find properties which should be in demand over the course of a cycle thanks to their strong locations, flexibility of use and ESG credentials. BREI has fallen onto one of the widest discounts in the sector of c.39%. This is despite its strong performance prior to the pandemic (as discussed in the Performance section) and 43% of the portfolio in the outperforming industrials sector. Since taking over in 2016, Peter has increasingly favoured this area at the expense of retail, and he made two disposals as recently as December which helped the trust build up cash prior to the emergence of the pandemic. Commercial property rents are under pressure thanks to the impact of the pandemic, particularly in the retail and office sectors. BREI has cut its dividend for Q1 2020 (calendar year) by 50%. After the cut, the quarterly dividend amounts to a 4% yield on an annualised basis. The gearing of 25% on an LTV basis (33% on an NAV basis) is in line with most sector peers. As discussed in the Gearing section, the loan is secured against a portfolio rather than individual properties with large falls in NAV necessary for the covenants to become an issue.
Companies: BMO Real Estate Investments Limited GBP
Commercial property investors have experienced a wildly volatile few months and the outlook is still extremely uncertain too, thanks to the government response to the coronavirus outbreak. Many investment companies have cut or cancelled their dividends; and the pace and scope of the lockdown lifting will affect how quickly and to what extent their rental income recovers. As a result, they sit on wide discounts to NAV. On the other hand, other areas of the property market have seen limited or no effect. Some of these alternative sectors have seen their share prices fall and rise dramatically, close to their pre-crisis valuations. To us it seems that investors have a tough balancing act to perform. In the generalist REITs, we think the steady subsiding of the epidemic and loosening of economic restrictions mean potential opportunities in the discounts. However taking advantage of these opportunities means accepting the risk of short-term dividend cuts and plenty of uncertainty around government policy. On the other hand, some of the alternative areas offer much more secure dividends, but on a portfolio level and based on share prices they offer very little valuation cushion.
Companies: BREI BBOX SHED
Inflation has been relatively tame for the past two decades, yet history suggests it would be unwise to reject the possibility of a damaging period of higher inflation out of hand. Central banks’ post-crisis quantitative easing policies have not led to the high inflation expected by some, but periods of high inflation in the past have been due to very different causes. When looking at the historical record, we see clear signs that the threat of inflation cannot be written off, and so taking out an insurance policy might be wise. Below we consider the potential sources of an inflationary shock to the global economy, and some assets and trusts that offer protection.
Companies: UKW RICA BREI BRWM
BMO Real Estate Investments (BREI) is a Real Estate Investment Trust (REIT) which aims to generate an attractive income from a portfolio of commercial property assets selected for their quality characteristics and income-generating potential. One of the key attractions is the yield on the portfolio which has enabled a 5p per share dividend to be maintained over the past five years. On the current share price this represents a yield of 5.9%. The NAV yield of 5.3% compares to 4.4% on the MSCI Quarterly Property Index. BREI is a broadly sourced trust, with all sectors of the portfolio generating a higher income than those in the benchmark. The manager, Peter Lowe, aims to pay a high yield without sacrificing income growth, yet still being mindful of the need to protect capital. Over the year to June 2019, like-for-like income on the portfolio has grown by 4.4% compared to 2.2% for the index. The trust’s outperformance of the index and sector over five years has been largely driven by a superior income return. The trust has net gearing of 26.5%, with £90m of structural gearing maturing in 2026 (roughly 35% of NAV) offset by holdings in cash. This gearing has helped the trust outperform in rising markets but also increases its sensitivity to falling markets. Since taking over in 2016, the manager Peter Lowe has shifted the portfolio to be overweight industrials and reduced exposure to retail, avoiding more troubled sectors such as shopping centres and department stores. Peter has also concentrated the portfolio further in the South East of England. He focuses on locations with alternative uses and strong economic fundamentals, which should support value in a property past the end of its current tenancy, as well as aiding resilience in a downturn. Beyond location, the quality emphasis comes through in an exceptionally low void rate (currently 0.1%), low levels of over-rent, and high exposure to tenants in less cyclical and more defensive industries. The trust discount has widened significantly in recent months as concerns over Brexit have resulted in poor market sentiment towards UK commercial property. The managers believe that BREI is not overly exposed to a hard Brexit outcome, given the quality and defensive characteristics of the portfolio. The shares now trade on a discount of 19.5%, having been at a premium as recently as 2018; this followed the rebound which occurred after the 2016 referendum sell-off.
RDL Securitisation – Temporary suspension and portfolio update | F&C UK Real Estate – Change in company name
Companies: BMO Real Estate Investments Ltd.
Fundraising showed signs of picking up this month, and the focus was very much on the renewables sector. First of all there was Renewables Infrastructure Group, which launched a placing programme and an initial fundraising early in the month, targeting up to £170m. It ended up raising just over £300m, having received applications for nearly three times as many shares as were originally available, in an upsized and scaled back issuance. Greencoat Renewables also announced and completed a placing which raised EUR 148m, around 40% more than the target. Another indication of interest in this sector was John Laing Environmental Assets successfully placing around 22m of its shares that were being sold by The John Laing Pension Trust. Finally, with regard to news in this sector, the close of the US Solar Fund* IPO had to be put back after just falling short of its target by the original closing date – closing is now expected to take place on 10 April.
Companies: TRIG BBOX UKW GRP ALF ELTA ESP FAIR BCPT BREI HTCF MERI UKCM
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Marlowe has raised £30m in new equity to help finance the acquisition of Ellis Whittam (for £59m, all upfront). We update our forecasts to reflect this transaction, along with recent bolt-ons (FY22E EPS upgraded by 8% to 29.0p), and reaffirm our Buy recommendation.
Companies: Marlowe Plc
The current crisis is definitely unprecedented. Like most of its peers, not only did the group not make any extra provisions related to the pandemic but it released some provisions following an update to its macroeconomic scenario. The group also managed to mitigate the rate cut impact and generate 60bp of capital ahead of next year’s headwinds.
Companies: Lloyds Banking Group plc
In another upbeat update, GHT has confirmed that the business is tracking in line, in turn being driven by strong traction with key customer, ANZ. Here, new sales have driven a 20% increase in contracted customer revenue to >£11m in FY21. As a strategic partner (deeply involved with GHT in bringing new Clareti banking services to market) this extra investment is very encouraging, as it’s indicative of these services‘ strong future potential. Also announced today – GHT state that its transition to a recurring subscription model (commenced just two years ago) is now complete and that ARR now stands at £11.9m, ~+16% annualised organic growth since FY20 y/e. In a tough new business environment, we view this as a highly credible performance. It’s also worth noting that management reference remaining pipeline opportunities, these would further benefit strong forwards visibility – already £22.4m for FY21. Given this – and also as sign of confidence – today we reinstate FY21 forecasts. We look for a reacceleration in top-line growth: +16% y/y to £28.7m at a Group level, in turn driven by c.+24% organic growth in Clareti, to £20m. For valuation – with Clareti still in its relative infancy – we continue to view a sales multiple as most appropriate. Here, we note that peers typically trade in a 5-7x range vs. GHT at 4x our FY21 estimate. This suggests 25-75% upside to fair value for this disruptive company, with a multi-year growth opportunity still ahead.
Companies: Gresham House
Augmentum Fintech has confirmed the successful completion of the equity fundraise launched earlier this week. £28m (gross) has been raised through an oversubscribed placing at the fixed 120p price. This will allow the manager to target a plentiful £120m pipeline of opportunities; both new and in the existing portfolio. AF is carefully curating a diversified portfolio of investments which are innovating the future of financial services.
Companies: Augmentum Fintech
Avation is a lessor of 46 commercial aircraft to a diversified airline client base. This morning, the group has released results for the 12-months to 30 June 2020, which illustrate the challenges faced by its customer base as a result of Covid-19, as well as the corrective actions taken by the Board that have resulted in profitability being maintained in the year as a whole. Loan repayment deferrals of c.$24.4m were obtained in the period, in comparison to $13.1m short-term rent deferrals being granted to airline customers and thus emphasising management's focus on liquidity during an unprecedented period for global airlines. Avation again reports that it is currently reviewing alternatives in relation to the 6.5% senior notes due in May 2021. Whilst at this point our forecasts remain under review, and near term challenges remain across the industry, we believe that demand for aircraft from lessors such as Avation will increase in time as a result of airlines being even more reliant upon aircraft leasing firms due to the retirement of older aircraft during 2020 in combination with much weaker balance sheets that are unable to support direct aircraft purchases.
Companies: Avation PLC
Agronomics has announced it has conditionally raised £10.0m gross from an equity issue at a price of 6.0p, which represents a 6.8% premium to the most recently reported NAV per share of 5.62p. Assuming the company's post-raise cash balance is £8.15m, after repaying a £1.9m bridging facility, we estimate the new NAV per share to be c5.7p. We see significant potential in the cultivated meat sector and believe Agronomics is well positioned to support this developing sector and generate strong returns from these investments. We see upside in Agronomics' portfolio and have today initiated coverage with a Buy recommendation.
Companies: Agronomics Limited
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
Agronomics is an investment company building a portfolio of investments in the developing alternative protein sector. The company is focused on early stage investments, offering attractive valuations and significant upside potential. Importantly, we believe Agronomics represents an opportunity for public investors to gain access to early stage private companies, which might not otherwise be available. We expect the cultivated meat sector to be driven by a number of global mega trends that will increase public awareness of the issues the sector is aiming to overcome. We see strong upside in Agronomics' existing portfolio and initiate coverage with a Buy recommendation.
Secure Trust Bank’s (STB) Q3 trading update disclosed that Q3 was stronger than expected and FY20 earnings are likely to be well ahead of consensus forecasts. Loan repayment holidays in its Motor Finance and Retail Finance divisions were down remarkably and credit quality is not deteriorating. Loan demand is strengthening after the lockdown. Capital and liquidity remain good. The bank remains cautious due to continued COVID-19 and Brexit uncertainty and is still not providing formal guidance. We are upping our earnings forecasts and fair value from 1,704p to 1,756p. In our view, the valuation remains depressed compared to fundamentals with banking stocks still out of favour. STB trades on an FY20 P/BV of 0.53x, yet it has a strong track record of value creating returns (ROE above COE), a good capital base and liquidity. The Q3 good news reinforces our view that we are unlikely to see book value deterioration during this downturn to justify any NAV discount.
Companies: Secure Trust Bank Plc
Trading at MJ Hudson (MJH) has improved steadily since its March nadir, and visibility has improved. As such, we are reinstating forecasts, with Adj EBITDA of £5.5m and £6.7m in FY21E and FY22E respectively. We believe that MJH's material discount to its core peers (c30%) is unwarranted and consequently, update our rating to Buy (previously Under Review).
Companies: MJ Hudson Group Plc
Venture capital returns take time to emerge. Augmentum Fintech (“AF”) is a relatively new fund, yet we already see material embedded value with some well-established, highly profitable investments – such as interactive investor. Its dedicated focus on Fintech eliminates distraction. Appraising several key investments individually, and using balance sheet carrying value for others, we calculate longer term fair value at 1.6x FY20 NAV – likely nearer 2x, with value outside the scope of our appraisal.
Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd
Secular stagnation refers to the economic theory that growth will be persistently low for some time to come, due to an imbalance between savings and investment. If capital is saved rather than invested productive capacity lies idle, while the drag on consumption reduces demand in the economy. As a result GDP growth is reduced. As we have previously discussed, there is no historical evidence that GDP growth has a direct impact on stock market growth – in contradiction of the theorised linkage via earnings. However, in a world of secular stagnation in which there is a glut of savings, corporate earnings will be muted as demand for companies’ wares remains sluggish, which should negatively impact stock market growth. High rates of savings would also push equity valuations higher than they would otherwise be and thereby reduce future returns. Investors can respond to this situation in a number of ways. One is to try to find active strategies, which either seek to harness certain factors likely to boost returns or to generate high stockspecific alpha. In the first case this could mean looking to harness the small cap premium or to the emerging markets which should see greater earnings growth over the long run. It could also mean looking to the tech sector, where earnings are dependent more on secular changes within the economy than the growth rate of the economy. In the second case this would mean looking for highly active stock pickers who run concentrated portfolios and aim to pick the winning companies which can steal market share from competitors. We believe the investment trust universe is the perfect place to find such strategies, as the structure allows managers to focus on managing their strategy and not inflows and outflows, while being able to take exposure to relatively illiquid assets and harvest the premium for doing so. Another way of responding is to look for alternative assets which offer comparable or superior returns to the equity market as a whole. In our view, when we look at likely equity returns over the next ten years, some alternatives look compelling. In the below we sketch a rough idea of likely equity returns over the next decade and then introduce some trusts we think have the potential to generate similar returns from more predictable cash flows and potentially less volatile NAVs.
Companies: USF HICL NESF TRIG UKW NBLS
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
Deltic Energy is entering an exciting phase in its development based on its fully funded joint-venture projects with Shell. Preparations are now underway for an exploration well to test the Pensacola Zechstein prospect in the SNS (Southern North Sea). Deltic has indicated that it expects the current contingent well commitment to become firm on schedule by December 1, 2020. Drilling, according to Deltic, should follow in H2 2021. We see scope for positive news flow over the next few months, not least from the evaluation of Shell’s recently obtained processed 3-D seismic over Pensacola. Following Pensacola, the Selene prospect is scheduled to be drilled in mid-2022. The recent 32nd Round UKCS licence awards greatly expands Deltic’s exploration potential in the CNS and particularly the SNS Carboniferous fairway. Here some highly prospective acreage has been obtained.
Companies: Deltic Energy PLC