Investment Column: Derwent is a solid enough performer

Close Brothers; Heritage Oil
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Our view: Hold

Share price: 1,459p (-4p)

Derwent London, the office landlord, joined the chorus of commercial property companies singing the praises of London's buoyant market yesterday, following similar noises made by larger rivals such as British Land and Land Securities recently.

Derwent London – the largest central London-focused real estate investment trust (Reit), with a portfolio valued at £2.15bn – said it was "encouraged by the continued improvement" of the market in the heart of the capital, despite economic conditions remaining "uncertain".

In terms of its own performance, the Reit continued to make progress with acquisitions, lettings and planning wins. More specifically, Derwent London said that central London lettings, excluding short-term transactions, rose by 7.9 per cent above estimated rental values at the end of last year and 2.6 per cent higher than 30 June values, compared with flat rates outside the capital. In fact, Derwent said it completed 89 transactions in the year to date at an annual rent of £7.1m.

The company also completed the high-profile purchase of Central Cross development on London's Tottenham Court Road for £146m. However, shares in Derwent, which fell a bit yesterday on profit taking, have had a good run this year and now trade at a 2 per cent premium to Evolultion's end of December forecast net asset value per share, while offering a forecast dividend yield of 2 per cent. Rentals are growing in Central London while Derwent's debt is falling and interest rate hedging is in place. So the stock has its good point. But its valuation offers little upside. There is a case for taking profits but we'd hold for now.

Close Brothers

Our view: Hold

Share price: 806p (+4.5p)

Close Brothers is and remains something of an oddball, a ragbag of different financial services businesses in one group which is really hard to compare to anything else.

Yesterday the company released a solid enough looking trading statement for the first quarter, which in Close Brothers' case spans the three months to 31 October. On the downside, the fund management operation lost money, but that was expected as the operation is undergoing a restructuring. A touch more worrying was the fact that the bad-debt ratio increased, thanks to legacy property business.

Nonetheless, there were things to like to in the statement, particularly the performance of Winterflood's, Close's brokerage, which was unexpectedly resilient, while the loan book is growing, suggesting the company's banking business is in reasonable health. But the stock has had a good run and at 12 times full-year earnings isn't cheap, but we'd hold for the 5 per cent prospective yield.

Heritage Oil

Our view: Buy

Share price: 367p (-8.8p)

Heritage Oil has published some promising news on a key well in Iraq's Kurdistan region. The Miran West-2 development, it said, beat its target, encountering hydrocarbons at deeper than expected depths.

You'd expect news like that to trigger gains in the stock. But no such rise was forthcoming. The most obvious reason is profit taking as Heritage shares are up more than 20 per cent since the beginning of October. But the bears might well point to a second reason, namely the fact that Heritage is mired in a tax dispute with the Ugandan government over the sale of assets to one time partner Tullow.

There was no update on that issue, but even if Heritage has to pay out, it would still be in a strong position for an oil prospector. Indeed, as of the end of September, Heritage boasted a cash pile of $614m (£522m) excluding reserves. That, coupled with the fact that the shares, at 367p, are below Oriel's estimate of 488p per share for the company's risked net asset value, with potential gains from exploration of 120p a share. We say buy.