Greycoat shows flair in property

The Investment Column
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It can be difficult peering through the boardroom shenanigans at Greycoat to see what is going on at the trading level. The departure of Brian Myerson from his non-executive directorship a couple of months ago was a typical distraction but it shouldn't draw too much attention away from what is one of the property sector's more interesting plays currently.

Not that that is much of a distinction in an industry that has studiously failed to live up to expectations of recovery over the past two or three years. Making money out of commercial bricks and mortar has become too tricky for many in the game and share prices, despite a recent flicker of interest, have been dull in the extreme.

If truth be told that is probably the real reason behind the recent bust- up between Mr Myerson, whose UK Active Value fund is Greycoat's second- largest shareholder, and the company's management. UKAV never made any money by sitting quietly on its hands and, having made less than it might have hoped out of Greycoat's restructuring, it probably thought it was time it stirred the pot a little.

The sale yesterday of one of Greycoat's largest investment properties, a big office building in Victoria, let to the government, is an interesting development. Releasing funds for smaller, more liquid investments, which offer scope to raise value by letting space and rejigging leases, is a sensible course of action in a market characterised by persistently flat capital and rental values.

The complaint of Mr Myerson that Greycoat's management would use the funds to kick start its nascent development programme, providing the capital to make the mistakes that brought it to the brink of collapse in 1993, seems wide of the mark. The funds are firmly earmarked for investment, the company says.

Not that it isn't dipping its toe in central London developments again, but the funds for that, pounds 12m from the sale of a 50 per cent interest in a City office development that has been shelved for this cycle, is relatively small beer compared to the net pounds 34m from the Buckingham Palace Road sale to CINMan.

Greycoat believes that the next year or so will provide a narrow window of opportunity to build profitably in the City and West End, where a shortage of well appointed buildings is pushing rents higher. It is probably right and as one of the most focused London developers, the company provides one of the best exposures for anyone with faith in the capital's property market.

In a rising market any fool can make money out of property, but when the sector is in the doldrums, property companies need a bit of imagination to make their assets sweat. Hammerson and Argent are doing it, and so, it would, appear is Greycoat. A strong hold.

S&N buys into biotech

Ever so quietly, Smith & Nephew is turning itself from a rather dull, broadly based health-care group into something a lot more focused and exciting. After last year's disposals of surgical gloves, washroom supplies and the last remaining pharmaceuticals business, the group is pared back to medical areaswhere it has strong positions.

But the latest deal with Advance Tissue Sciences of La Jolla in California, announced yesterday, proves that the group is also up with the best when it comes to signing up biotechnology groups at the leading edge of medical science. Capitalised at $500m on the US Nasdaq, ATS has discovered a way of artificially growing skin from human cells held in "tissue banks". The initial target of the new treatment, called Dermagraft, is for use in $2.5bn market for dealing with foot ulcers in diabetics.

An eight-week course of surgery using artificially cultured skin could prevent amputation of the limb and would represent an enormous saving on hospital and nursing costs. Smith & Nephew remains cagey but further development holds out promise for treating other wounds, such as those caused by burns, bed sores and leg ulcers.

The group is paying ATS $10m down for a 50 per cent share in a new joint venture to develop the treatment and is committed to two further $5m payments. Thereafter it pays $10m for every $100m of sales achieved by Dermagraft, up to a maximum of $50m. Given the experience of previous innovations, such as Opsite and Allevyn, Smith & Nephew's moist wound dressings, the group is estimating the $500m sales required to achieve the top payout could take 10 years to achieve.

But, assuming margins of well over 20 per cent, that could be chipping in profits of pounds 45m by then. In the meantime, a 1994 deal signed with ATS for the development of artificial cartilage could be bearing fruit.

Dermagraft should receive approval from the US Food & Drug Administration next year and be on the market in 1997. The shares, up 3p at 187.5p, stand on a forward multiple of 16, assuming profits of pounds 195m this year. Although mildly dilutive in the first full year, the ATS deals offer a low risk way of cashing in on the biotech boom. Hold.



Despite the quality of its nursing homes, Ashbourne has not proved a high-class investment for shareholders who bought in at the November 1994 placing. Since then, the shares have barely peeped above their 150p issue price and remain well short of it, despite yesterday's 2p rise to 139p.

Interim results showing a 57 per cent rise in pre-tax profits to pounds 4.9m in the 26 weeks to March were respectable enough. But in its short life on the stock market, Ashbourne has consistently disappointed expectations. The problem is its insistence on developing its own business from scratch when the outlook for the nursing home market is looking increasingly cloudy.

The acceleration in the group's opening programme to 400-500 new beds a year has had an inevitable effect on occupancy levels. Mature homes remain well insulated from the market's vagaries. Occupancy rates at 85 per cent are only down 3 percentage points since October and margins are still typically 35 per cent. But the dilution caused by 25 per cent of the portfolio being less than two years old means overall occupancy has plunged 10 points to 72 per cent in the past six months .

Ashbourne points to the pounds 1.94m exceptional gain in these figures on the sale and lease-back of five of its homes as an indicator of the hidden value within the group. The group argues it could cope with double the current pounds 32m of assets under lease and still take on pounds 60m of debt, racking up development profits as it sells off mature homes.

While this shows a commendable determination in resisting share issues, gearing of 200 per cent and upwards-only rent reviews would leave the company dangerously exposed. Profits of pounds 6.5m in the full year would put the shares on a forward p/e of 13, assuming 15 per cent tax. Only worth holding while 25 per cent holder Sun Healthcare decides whether to bid.