The Investment Column: Hold on to Great Portland at this demanding time
Myhome International; Trafficmaster
Wednesday 23 July 2008
Our view: Hold
Share price: 344p (-7.25p)
When big retailers such as Next, Argos and BhS start ganging up on their landlords to cut the amount of rent they have to pay in advance, you know the property market is in for a pretty tough time.
Great Portland Estates owns a swath of offices and shops around London's Regent Street, Oxford Street and Bond Street axis. Such a prime location allows it to feel it is better insulated than most property companies and more able to withstand any prolonged downturn. This area of London doesn't sing to the same tune as most high streets, as it elegantly puts it.
For a start, there is no great overhang of empty properties in the West End to depress rents as was the case in the last serious downturn of the early 1990s. Many of its tenants are also international companies willing to pay a premium to operate in the area. On top of that, GPE has been commendably cautious on the speculative development front, with only one key project in play at the moment.
During the first quarter, there was a 4 per cent fall in asset values, reflecting tougher conditions in financial markets. The like-for-like asset value, the measure used to calculate the underlying health of a property company, fell 7.6 per cent and is now down 18 per cent from its peak. The total value of the estate fell by nearly £64m to £1.5bn.
Demand for quality West End office space saw rental values climb by 0.4 per cent while in the City and Southwark, where there is greater exposure to the shakeout in the financial sector, there was a fall of 0.1 per cent.
GPE says letting demand remains firm, although there is certain to be some hard bargaining over terms particularly for less attractive parts of the estate. Companies seeking office space are also more likely to be considering locations where rents are lower.
The company frankly admits that tougher credit terms will inevitably feed through into lower property values – as is happening in the residential market.
GPE is a niche player with prized assets in a coveted corner of London, but at this stage of the credit crunch cycle it could still run into problems with tenants facing difficulties meeting rent demands. The shares are no more than a hold.
Our view: Avoid
Share price: 4.875p (-3p)
Myhome International seems to belong to a different age. The group came up with the idea of franchising domestic services such as oven and carpet cleaning, window cleaning and lawn cutting for "cash-rich, time-poor" customers.
The shares hit the giddy heights of 106p. One credit crunch later and it is a very different story. The dash for growth left an awful lot of costs needing to be taken out while at the same time the number of franchisees it has signed up has fallen short of expectations.
The AIM-listed company, which is in breach of some of the covenants within its £8m bank facility, crashed 38 per cent yesterday after announcing it was discussing plans for a possible equity fund raising at a major discount to the current share price. Some of the larger investors will be asked for their support.
In the meantime, it said trading for the third quarter to the end of September is in line with expectations. Trouble is, a long cash-squeezed summer could derail what, after all, are pretty flimsy arrangements between franchisees and customers. Potential franchisees are also finding it tougher to raise finance. Only those with good credit records stand a chance.
The board says talks to restructure debt with Lloyds TSB are at a constructive stage. On the plus side, the company can point to near trebled sales during the first half. Even so, avoid.
Our view: Hold
Share price: 32p (unchanged)
Trafficmaster is a puzzle. The shares have lost nearly half their value in a year, yet the company, best known for in-car navigation systems, continues to punch above its weight, tying up deals to supply equipment to major car makers such as BMW and Citroë*while also growing through acquisition. The latest, for which it is paying up to £4.6m, is Tri-Mex, which runs a pan-European service for tracking stolen vehicles and cargo across 38 countries.
The deal was accompanied by a reassuring if low-key trading update. Revenue in both the UK and US is ahead and profits are in line with expectations. The market expects around £6m for the year.
There is little doubt Trafficmaster has suffered from the mauling at the small-company end of the market. But it should be making more headway in the current climate. As fuel costs rise, so ordinary motorists as well as big fleet users can benefit from navigation devices reducing unnecessary mileage. There is also a strong environmental gain from reducing unpleasant emissions.
It has forged alliances with leading manufacturers such as Bentley and Volkswagen, while in the US, which accounts for half its business, it sells fleet- tracking equipment to the major truck group Ryder. The shares sell on an undemanding 7 times earnings but, even at this level, buyers are not biting. Hold.
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