The Investment Column: British Land still worth a punt despite short-term wobble

Ladbrokes; Care UK
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The Independent Online

Our view: Buy

Current price: 912p

What happened? Bricks and mortar were supposed to be safe investments. Shares in British Land started the year at an all-time high, buoyed by the prospect of untold riches resulting from the conversion to Real Estate Investment Trust status. Since then it has all been downhill, and the UK's second largest landlord has lost 46 per cent of its value since January.

Yesterday's first-half results were nothing to get excited about either – the company's Net Asset Value was unchanged at 1,642p. British Land reported a 10 per cent jump in underlying pre-tax profits to £143m but recorded a pre-tax loss of £35m, a result of falls in the value of its property.

Its property portfolio was hampered by a 2.9 per cent decline in its retail property, although its office space property grew in value by 3.6 per cent. British Land has ruled out a similar demerger to that announced by rival Land Securities on Wednesday, and for some that is a disappointment, although management feels it does not need to undertake such measures to generate value for its investors.

British Land's portfolio is split between London office space and retail. It owns the Broadgate development in the City and approximately 48 per cent of its exposure is in City office space. Its major investment outside London office is the Meadowhall shopping centre, in Sheffield, although a recent attempt to lower its stake was scuppered by the credit crunch.

The fact that commercial property values are not what they were is hardly news – but has the market oversold British Land? The long-term answer has to be yes. Its presence in high-quality London office space should support the valuation, and it has a large number of potentially lucrative development projects in the pipeline.

The stock is trading at a historically high discount to its net assets, and although it is fair to say that the hype over the benefits of Reit conversion were overcooked, this looks like a decent long-term buying opportunity, so long as investors can stomach the possibility of further short-term weakness.


Our view: Buy

Current price: 344p

So, it turns out that bookies can have a bad run too, and that will probably delight anyone keen on a punt. But for investors in Ladbrokes, the world's biggest bookie, yesterday's trading update was far from a winner and sent the shares almost 10 per cent lower.

The majority of the shortfall in Ladbrokes' retail performance was down to punters having a run on football results and cancelled race meetings. Underlying profits for the four months to 31 October fell 12 per cent as UK retail over-the-counter gross win declined by 5 per cent. The figures were massaged by a 33 per cent rise in total gross win, although "high rollers" accounted for 26 per cent of that.

It appears that the smoking ban has had little impact on business, with most of its shops a step away from the pavement the industry has not suffered the same withdrawal symptoms that bingo has. Ladbrokes looks to have won some machine gambling business from the bingo halls and machine income was up 25 per cent year-on-year with gross machine win up 2.4 per cent over the quarter.

There is one potential stumbling block on the horizon – should England fail to qualify for the 2008 European football championships, as looks likely, Ladbrokes stands to lose millions in lost punts, and the situation will worsen if Scotland also fall at the last hurdle. However, that scenario already looks priced into the shares.

Bookies go on losing streaks just like any other punter. But as anyone who has had a bet knows, it is rare to find a broke bookie. Ladbrokes will recover, and on 11.5 times forecast 2008 earnings the stock looks attractively priced. Buy.

Care UK

Our view: Buy

Current price: 361p

It hasn't exactly been a red letter year for investors in Care UK. Concerns over the government's commitment to continuing the outsourcing of some NHS functions has left analysts questioning the company's growth potential and the shares began yesterday's session almost 40 per cent lower than June's high.

Things got even worse yesterday. The company confirmed that the Department of Health has asked it to voluntarily terminate a contract to run a diagnostics contract in the West Midlands, worth £30m per year, resulting in another 30 per cent being knocked off the company's valuation.

That overshadowed some better news that the company also released yesterday – Care UK has won sole bidder rights on a second Manchester CATS project, as well as other public health projects in Southampton and Essex. In total the deals should deliver new revenue of £51m per year for the company.

Outsourced healthcare projects only could for about 15 per cent of Care UK's total revenue. The rest of the business is involved in primary, residential and acute care. The company runs 90 community-based care homes and hospitals, delivering care for the elderly, handicapped and those with learning difficulties. That side of the business is still going very well.

After yesterday's dramatic fall, the stock trades on just over 13 times 2008 forecasts. That looks like a good price, and given that the loss of the NHS contract will be compensated and it was the result of a very local issue, this could be an excellent buying opportunity in the run-up to Monday's results, which should be in line with forecasts, at the very least. Buy.