Investment Column: Retail clouds the case for British Land

Premier Foods; Micro Focus
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The Independent Online

Our view: Hold

Share price: 543p (-3.5p)

More good news from British Land, which yesterday unveiled a set of third-quarter results that had analysts gushing. The property company showed underlying portfolio growth of 2.3 per cent (to £9.3bn) in the third quarter, comfortably ahead of the 1.2 per cent and the 1.4 per cent in the first and second quarters respectively.

The net asset value per share also increased by an even more balmy 4.4 per cent in the third quarter to 548p. That measure is actually up 25 per cent over 12 months. All this and underlying pre-tax profits up 10 per cent to £64m.

So should we steam in? We bought British Land in August, not least because of its best-in-class dividend, and at the time the shares stood at 471.5p, so it's done well. However, much depends in the future on the outlook for the retail sector. British Land's portfolio is split: two thirds comes from retail, one third from offices in central London.

The latter should do very well over the coming months. There has been a marked lack of developments in the capital, so space is at a premium and rents are rising as a result.

Retail is more murky. Rents are also rising (but more slowly) and the group is outperforming. It added another shopping centre to its portfolio yesterday. But whether demand will remain rosy with a consumer squeeze already in effect and online shopping growing remains to be seen. And just look at what has been happening to the struggling JJB Sports.

The analysts at Matrix Securities have British Land's full-year net asset value per share at 538p for full-year 2011, which means it is trading at a slight premium to forecasts and at around par to yesterday's reported figure. As such it is not cheap compared to peers. But we'd hold, not least for the yield (well covered by earnings) which sits at 4.8 per cent. Hold.

Premier Foods

Our view: Hold

Share price: 25.75p (+3.65p)

It may sell waistline-expanding brands, such as Mr Kipling cakes and Ambrosia rice pudding, but it was a much slimmer version of Premier Foods that posted full-year results ahead of expectations yesterday.

The UK's biggest food manufacturer is lighter because it will use the £387m generated from the recent sale of its Quorn meat-free business and grocery canning unit to pay down its net debt to below £900m, compared with £1.4bn a year ago.

This has already helped Premier Foods to secure a credit rating from Standard & Poor's, which will pave the way for it to reduce its debt servicing costs and issue bonds.

On trading, Premier Foods touted a 0.6 per cent rise in its underlying operating profit to £311m for the 12 months to 31 December, driven by improved profit at its grocery and Hovis bread business. The performance was far less tasty at its Brookes Avana unit, the company's chilled ready-meal and own-label operations, where it took a £125m goodwill impairment charge. This resulted in an overall pre-tax loss of £98m for Premier Foods.

However, we would note that Premier without its debt burden is now in far better shape to reinvest in its brands in the hugely lucrative UK grocery sector. Moreover, its shares only trade on a modest forward earnings ratio of 5.6.

That said, with consumers tightening their belts and its Brookes Avana problems not yet resolved, we advise that potential investors hold fire until there is further evidence of the group turning the corner. Hold.

Micro Focus

Our view: Buy

Share price: 291p (-104p)

Micro Focus International plunged last night after revealing that it had lost some large US deals in its third quarter. The IT firm also warned that it was unlikely to able to recover the shortfall in revenues in the final three months of its financial year.

This means that annual revenues are expected to be in the range of $432m to $442m, while adjusted earnings before interest, tax, depreciation and amortisation are expected to be in the range of $159m to $167m. The latter is before a restructuring charge, stemming from plans to cut costs and rejig the business, of between $14m and $18m in the final quarter.

Though disappointing, we would point out that the stock now trades on around 8 times forecast earnings, leaving it at a 55 per cent or so discount to the wider sector. That, coupled with the promise of the restructuring, makes this a buy, albeit a risky one, in our view. Buy.

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