Investment Column: St Modwen stricken by the property malaise
Tuesday 15 July 2008
St Modwen Properties
Our view: Sell
Share price: 310p (-5.5p)
The chairman of the property development group St Modwen Properties, Anthony Glossop, says he would not be a seller of the group's stock, despite the desperate state of the market. Sadly, few are going to agree with him after yesterday's interim results, which showed a £20m loss, versus a £65.1m pre-tax profit in the same period last year.
Everybody knows that the UK property market is in dire straits – the principal reason for St Modwen's loss is a £54.6m writedown – and few are predicting that things are going to get better soon.
Mr Glossop says rightly that the company is not burying its head in the sand and is listening to the markets, but burying cash in the sand would be a more fruitful option for punters. Indeed, even Mr Glossop concedes that it will be at least 2010 before the residential property sector even thinks about rising from its sickbed, and that the group cannot rule out further writedowns.
This is unfortunate, as most of the analysts agree that the group is well run and is realistic about the state of the market. Those at KBC Peel Hunt cut the company's predicted net asset value by 30p to 341p yesterday, blaming the macroeconomic environment. Even the group's own brokers at Landsbanki were obliged to cut the company's target price from 470p to 355p. Quite how the stock will reach even that level remains a mystery, but the watchers do say that "the shares are good value below £3 on a 12-month view". It is likely that the stock will fall below £3, but whether that would then precipitate a buying frenzy remains to be seen.
Property, which frankly has had it pretty good over the last 10 years or so, is finding the current state of the market tough going. The problem for the company, and others in the sector, is that things are going to get worse before they get better. Investors should continue to avoid the whole lot. Sell.
Our view: Buy
Share price: 298p (+18p)
Many learned economists have spent a long time saying that, despite the pain, the present market "correction" is actually good for the economy. It is also good for the data management company SDL, which sells software to companies looking to spread their electronic content into new markets.
The group yesterday issued a cheery trading update, which said that most analysts' predictions will be blown away, with six-month revenues expected to be up 37 per cent to £75m.
Mark Lancaster, the chairman and chief executive (a dual role that he says the City is not concerned about, and anyway he expects to give up one job within the next two years) says the impressive numbers are down to SDL's customers, which include Dell, HP and Kodak, seeking overseas opportunities as traditional markets start declining: much of SDL's work is to translate electronic content into foreign languages.
All that is fine, but does it not mean that once the credit crunch has passed, SDL becomes an investment also-ran? Not at all, says Mr Lancaster, in good times his clients have more cash to invest.
The group's stock has suffered less than others in recent months, so new investors might feel that they have already missed the boat. However, experts at Kaupthing reckon that with yesterday's news, the group will trade at 13.6 times earnings this year, "which given its track record and improving organic growth, [the shares are] arguably cheap despite nervousness on the environment".
The watchers have a target price of 340p, although investors might expect that to be increased after the update. The stock traded at 350p in May, so at least the initial level should not be too difficult.
Even in the middle of a downturn, there will still be some companies that do well, and Mr Lancaster says SDL has so far not felt the effects of the credit crunch at all. Buy.
Low & Bonar
Our view: Buy
Share price: 90.5p (+3.5p)
Paul Forman, chief executive, says he is often left scratching his head when it comes to the specialist textile and flooring manufacturer Low & Bonar's disappointing share price. Investors are more likely to be shaking their fists as the stock has gradually slipped, closing at a two-year low last Friday.
In fairness to Mr Forman, the market is not listening to what is actually a stonking good company. Low & Bonar posted impressive interim results yesterday, showing a 50 per cent increase in revenues and pre-tax profits up 62 per cent to £12m. The company has benefited from acquisitions, but Mr Forman says that the good numbers are also down to "self-help". The group has increased its operations overseas, particularly in the Middle East and Asia, and yesterday's results are largely due to those activities.
Despite the strong performance, the shares are not performing well, which Mr Forman put down to "smallcap malaise" and the fact that the investors still see the group as closely linked to the toxic house-building sector, which makes up less than 5 per cent of one of its divisions. The stock is undervalued and investors should take heed. Buy.
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