Call it a halo effect. More than a year into a severe sell-off in real estate stocks, St Modwen is conspicuous as the only constituent of its sector whose shares trade at a premium to its net asset value (NAV) — 25 per cent at last night’s close.
Part of that resilience can be deemed a technicality: the FTSE 250 regeneration specialist calculates NAV extremely conservatively — on the historic price at which it acquired land, rather than its present market value — so a premium is easier to achieve. But it also reflects St Modwen’s undoubted virtues. It has produced an average annual post-tax return on equity of more than 21 per cent over the past five years and is the only London-listed property company to have raised its dividend by 10 per cent or more in each of the past ten years.
So yesterday’s full-year results — which showed a 21.9 per cent return on equity, a 20 per cent increase in net asset value and a 15 per cent rise in the dividend — might be considered business as usual.
Except that St Modwen could not help but caution that this year’s numbers will be hurt by the fall in market value of its investment properties: by an expected £32 million in the six months to May 31. Even so, the company is confident that it will be able to deliver an increase in net asset value this year — something that none of its peers are able to claim.
Not that there was much in yesterday’s results to pull in short-term investors. Whereas 2007 was dominated by three big projects - the securing of outline planning consent for the development of the former Corus steelworks at Llanwern, and the disposal of former MoD properties at Eastcote and West Ruislip — progress in 2008 is likely to be more piecemeal and spread across a portfolio of more than 100 projects. These range from passing planning milestones at some of its larger schemes, including the former BP refinery in Neath and the old MG Rover plant at Longbridge, to the development of retail projects at Edmonton, Farnborough and Wembley.
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St Modwen’s core attraction is its ownership of 5,500 acres of developable land, which, given their spread between industrial, retail and residential schemes, and the company’s long-term track record, suggest that its target of doubling net asset value every five years remains feasible. More immediately, the forecast rise in its rental income — which means that, no matter how bad things get, financing costs are covered by rent — provides comfort. So, too, does the securing of banking facilities through to 2011 and family shareholdings of 42 per cent, which could attract a bidder should the shares begin to underperform.
Hold on at 482½p.
RWS Holdings
It is perhaps only right that RWS should benefit from a translation effect. This AIM-listed company is a translator of patents and, with Germany comprising its biggest market, it draws 60 per cent of its sales in euros. With that currency up 10 per cent against sterling over the past year, RWS is a clear beneficiary: to the tune of about £500,000 so far on forecast pre-tax profits in the 12months to September 30 of about £14 million.
That RWS should state yesterday that first-quarter trading was ahead of expectations — the fact that 60 per cent of its costs are in sterling also gives it a transactional currency gain — cannot be pinned on the euro alone. Organic revenue growth is running at double digits in percentage terms, a testimony to both RWS’s status as a play on globalisation and its ability to win market share among big German companies: clients include BASF, Bayer and Siemens.
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Not that shareholders have been taking success for granted. The May 1 advent of the so-called London Agreement — the deal that waives the requirement for European patents to be translated into the language of individual European Union states — threatened to dent short-term profitability. However, that hit should be offset by yesterday’s £6.8million purchase of DCS, of Germany, which should boost next year’s earnings by 12 per cent. With the requirement to protect intellectual property close to recession-proof and RWS boasting £19 million of cash, the shares at 339p, or 12 times 2009 earnings, are inexpensive. Buy.
Fidessa
With all its sales drawn from the financial services sector — it is a world leader in developing equity trading systems for institutional stockbroking — Fidessa is not the sort of company that you might expect to predict that demand will remain “strong” in 2008. But with Fidessa reporting a 28 per cent rise in underlying full-year revenue and no change in sales patterns during January, there is no immediate reason to doubt it.
Aside from a dominant market position, Fidessa has benefited from regulatory changes in 2007 — notably the advent of the Market in Financial Instruments Directive in Europe and Regulation NMS in America — that require increased IT spending by its clients and whose full effects have yet to be felt. The company has also changed its business model since the turn of the decade, so that the importance of one-off consultancy and licence-fee sales have been replaced by longer-term contracts: 76per cent of revenues are now recurring. So, even if investment banks start cutting staff numbers heavily, as is expected, sales should not suffer in line. With the shares down a quarter over the past three months, the stock market has already priced in a downturn. However, at nearly 19 times current-year earnings, Fidessa, at 844¾p, can be no more than a hold.