Yahoo Finance Five months have undone five years of good work – but we’re standing by this stock
Perhaps this column could have been nimbler, and traded around the flow of news more aggressively, as worries over a steep downturn in economic activity in CLS Holdings’ three major markets of Britain, Germany and France were never going to be good for sentiment towards the FTSE 250 company.
But trading brings frictional dealing costs (and possibly taxes) which can quickly accumulate and erode portfolio returns. It also brings about the need for two decisions: when to sell and when to buy back (or at least what to buy instead). As a result, we have simply stuck with the stock. That still feels like the correct policy, especially as the valuation already prices in a lot of bad news.
It is six years since our first look at CLS Holdings and five-and-a-half years of good work are now being overshadowed by five months of carnage. A 40pc-plus paper profit on the real estate investment trust as of July has evaporated, thanks to the combination of rising interest rates, fears of recession and questions over how the French and German economies will cope with their respective energy crises.
Half of CLS’s real estate assets are in Britain, with 39pc in Germany and the rest in France. The company has nearly 750 tenants across more than 90 properties, assets focused on major global cities such as London, Munich, Berlin, Hamburg and Paris, and a blue-chip customer base that should provide steady rental income – government bodies account for a quarter of the rent roll and professional services and information technology companies another quarter.
Better still, more than half of the rents are index-linked, to provide investors with some protection from the ravages of inflation.
Granted, the company has £800m-plus in net debt, the average debt maturity of 4.4 years is shorter than the liability profile of many Reits and £75m in loans is due for repayment in the first half of next year.
However, 80pc of the debt is fixed rate and a further 5pc has a cap, the overall loan-to-value ratio of 39pc is not unduly high and talks on refinancing those 2023 debt maturities continue. Those discussions will be helped by how rent collections remain consistent, with 98pc of dues paid on time in the first nine months of 2022.
Markets have taken fright all the same, not least as vacancy rates have increased to 7.4pc as of September, according to last week’s third-quarter trading update. That compares with 6.9pc in June and 5.8pc at the end of 2021. Investors understandably remain concerned that vacancies and a downturn will lead to pressure on rents and also property valuations, even though CLS’s net asset value (NAV) per share rose by 1pc between December 2021 and June 2022.
Decreases in NAV in future are perfectly possible, as the interim results to the end of September from FTSE 100 Reits British Land and Land Securities make clear, even if direct comparisons between those businesses and CLS are not ideal, owing to the different business mix.
Not spotting that earlier this year, when fears over oil and gas prices and supplies into Germany were soaring, was where this column’s blunder lay. But we are where we are and that is holding a share priced at 158.8p that currently gives the holder access to 329p a share of net assets, a discount of 52pc.
We may be lacking a catalyst for a recovery in the share price, but the discount should help to protect us from further falls. Nor has the valuation disparity escaped management’s attention. Fredrik Widlund, the chief executive, and the board sanctioned a tender offer in the summer and bought back 2.5pc of the company’s share capital.
Buybacks at such a large discount to NAV create value over the long term.
Nor should investors forget the presence of the Mortstedt family. Although Sten Mortstedt, the founder, died in 2020, the family still owns more than half of the shares. That aligns their interests with those of other shareholders and should ensure that no undue risks are taken.
Hold on to CLS.
Questor says: hold
Ticker: CLI
Share price at close: 158.8p
Russ Mould is investment director at AJ Bell, the stockbroker
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