Investment Column: West End cheer for Great Portland

Paragon makes a virtue of housing needs; GWR is well positioned to ride the digital wave
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The Independent Online

For the first time since he became chief executive two years ago, Toby Courtauld was able yesterday to point to a solid improvement in fortunes at Great Portland Estates.

For the first time since he became chief executive two years ago, Toby Courtauld was able yesterday to point to a solid improvement in fortunes at Great Portland Estates.

Investors would have been further cheered by the news that the property company will be returning £101.5m to shareholders.

The group, focused on London's West End, saw a small rise (2.6 per cent) in net asset value in the second half of the financial year, which concluded at the end of March.

For the year as a whole the NAV figure was down slightly, by 1.4 per cent to 282p, but sentiment has clearly shifted and, as Mr Courtauld said: "We have turned the corner."

According to Great Portland, conditions in the West End property market are considerably better than those in the City. Rents are rising in patches already in the West End, while the Square Mile is flat at best. This is because of simple supply/demand dynamics, with less vacant space available in the West End - and it has a broader range of occupiers than the City. The company predicts that rents in the West End will be rising across the board by next year, whereas the City will take until 2006 to be in this position.

The trouble is that it is the "grade A" or top-notch space in the West End that is most sought after and Great Portland does not have much of this. However, its £220m development programme should produce such space over the next few years.

Great Portland is returning 50p a share to investors. The company could be criticised for not using the cash for acquisitions. Great Portland says the kind of property it wants - buildings that require work - is just not available currently at attractive prices and its gearing, at 30 per cent, is too low to be efficient.

The shares, at 252.75p, don't trade at enough of a discount to current-year forecast NAV (some 282p) to be tempting. But given the upturn under way, it is worth holding.

Paragon makes a virtue of housing needs

The specialist buy-to-let lender Paragon turned in another impressive set of results yesterday, posting a 42 per cent increase in interim pre-tax profits of to £33.1m. These figures have been boosted by the addition of Britannic Money to its business, which it bought last summer. Even ignoring this, its numbers are up significantly.

The biggest worry for investors, however, is whether such growth can be sustained as the housing market continues to confound expectations and keep heading upwards. As the case for a hard landing in the residential property market looks more compelling, is this really the time to invest in a buy-to-let lender?

Paragon makes quite a convincing case for its future growth prospects. Renting is on the up, it insists, with student and immigrant numbers on the rise, and property prices racing out of reach of first-time buyers.

If house prices continue to rise, it argues, the demand for renting can only increase. And if prices fall, the demand for buy-to-let mortgages can only improve as investors try to take advantage of cheaper levels. Paragon says it is also stealing plenty of business from big banks, as investors continue to remortgage. Its order book - which is basically profits that have yet to be booked - is up more than 90 per cent on this time last year, a positive sign for the next few months. But with the shares, at 326.75p, trading on a p/e of 7.5 on its 2004 predicted earnings, compared with more than 10 amongst other specialist lenders, now cannot be a bad opportunity to get exposure to Paragon. Buy.

GWR is well positioned to ride the digital wave

GWR, the radio group, is full of confidence about its future. It is outperforming the industry on advertising, it is very well positioned for the move to digital technology and it has an attractive set of assets to bring to the consolidation game - led by its flagship Classic FM national station.

Yesterday's full-year results showed a doubling of underlying pre-tax profits to £17.1m, for the period to 31 March. UK ad revenues were up by 8.4 per cent, slightly better than the 7.8 per cent industry average. The company underlined its bullishness with the first dividend increase for 3 years, with a 9 per cent rise.

Debt has been reduced over the last three years from £172m to £54m today. The company has also exited overseas assets, giving it focus and a balance sheet to play with. Strategic moves still depend, though, on the attitude of the newspaper group DMGT, a 29.9 per cent shareholder.

GWR continues to invest 20 per cent of profits in digital radio, which is a way of future-proofing the group. While rivals criticise GWR for having lots of smaller stations, the company argues convincingly that these have a dominant position in their local markets, having them at least as profitable as many a "big city" station.

GWR shares, at 255.5p, trade on a forward multiple of 24 times, which seems about right. Hold.

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