Yahoo Finance Bricks and mortar may appear to be on shaky ground but this trust could yet deliver hidden value
Falling asset values, property yields that are looking less enticing relative to interest rates and ongoing questions over the challenges facing bricks-and-mortar offices and retail sites are all good reasons for investors to hurry on past British Land, a stock that continues to give this column a serious case of buyer’s remorse, despite a haul of more than 110p a share in dividends over the past five years.
However, the real estate investment trust (REIT) owns a prime portfolio of properties spread across office campuses, retail parks and shopping centres, which leaves it well placed to meet the needs of an increasingly segmented market. It is also under no pressure from its debt, and is growing rental income.
Just as pertinently, the shares trade at a thumping discount to net asset value, to price in a lot of bad news and not much good, so it is tempting to hold on, even if a near-term catalyst is clearly lacking, especially as the dividend yield is plump and the payment well covered by cash flow.
When all is said and done, last week’s full-year results received an indifferent response from the market. The shares sagged as Simon Carter, the chief executive, unveiled a greater-than-expected drop in net asset value (NAV) per share to 588p.
That was the result of an increase in yields, and that in turn was the product of the sharp rise in headline interest rates over the past year. The Bank of England Base Rate is now 4.5pc and, if forecasts are to be believed, heading toward 5pc.
Investors must therefore ask themselves whether the returns offered by property stocks more than compensate them for the risks involved, when, according to British Land, investment yields on retail parks, offices and warehouses range from 4pc to 6pc. Some could be forgiven for concluding that the extra one percentage point is not worth the trouble.
But there are two counters in favour of British Land. First, net rental income rose for the second year in a row. The 5pc increase came despite asset disposals and was helped by the absence of tenant failures.
It also took net rental income to £446m, as occupancy rates hit 96.7pc and 99pc of rent was collected on time, and that more than covered administrative expenses, the £111m net interest bill and the dividend.
Second, the company is under no financial duress. Granted, it has a £3.3bn net debt pile, including joint ventures, but it has plenty of undrawn debt and has no need to refinance any borrowings until 2026.
Admittedly, management’s forecasts suggest that net rental income will be broadly flat in the year to March 2024, but expectations are already low, judging by how the shares trade at a 40pc discount to NAV, and new developments and refurbishments have the potential to boost net rental income over time and further buttress cash flow and the dividend.
In addition, Britain’s interest rate cycle will turn one day, and pivot to easing from tightening, and such a switch could return REITs to investors’ radar, as returns on cash and the yields on Government bonds start to shrink.
It is going to be a bumpy ride, but there may yet be hidden value on offer at British Land.
Questor says: HOLD
Ticker: BLND
Share price at close: 356.4p
Update: Zytronic
There can be no denying that this column has made a total hash of studying rugged screens specialist Zytronic, where a profit warning has clouded the outlook once more. A net cash pile of £5.4m underpins the £10m market cap at the Newcastle-based company and we shall just have to sit and suffer rather than sell and crystallise what is a nasty paper loss.
Having come through the crackdown on betting terminals and Covid-19, Zytronic is now being hobbled by excess inventory at one gaming customer and the bankruptcy of another.
Micro-caps are by their nature riskier, because they tend to be less well diversified by product or customer or target industry, and this one proving no exception.
Zytronic has been through some big swings in sales and profits since its stock market debut in 2000 and emerged from them all, thanks to its healthy balance sheet. It may be asking a bit much to expect net profit to return to 2017’s peak of £4.6m or the dividend to get back to 2019’s 22.8p a share, but any movement in that direction could leave the shares looking very cheap, given the modest market cap. The company is cheap should the outlook become clearer.
Questor says: HOLD
Ticker: ZYT
Share price at close: 102.5p
Russ Mould is investment director at AJ Bell, the stockbroker
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