Brixton better prepared than most for slowdown

Calmer waters at Mersey Docks; Morgan Sindall is still a tasty prospect

As equity markets have crumbled, professional investors have preferred the solidity of bricks and mortar, and a great wall of money has gone into the commercial property sector this year. That has propped up property prices and, consequently, the share prices of the quoted property companies. But the foundations of this mini-boom are shaky, as Brixton (formerly Brixton Estate) was keen to point out yesterday.

Brixton has been honing its portfolio, previously a multinational sprawl of investments, and now focuses on light industrial property in the South-east England. Landlords in this sub-sector were able to wring some stonking rental income out of tenants in the last years of the Nineties, but a reasonably sharp slowdown is now in progress – threatening to leave the latecomers out of pocket.

Brixton has been far ahead of the curve, though. It has already decided to hold off on substantial acquisitions, and is hunkering down for the slowdown. The group's rental income was just 0.3 per cent higher at the end of June than it had been six months earlier, and the number of unfilled properties crept up to 6.2 per cent from 4.9 per cent. Brixton has cut back on its plans to develop sites, which would take many properties out of service, and will wait until the first sightings of an upturn before giving many of its properties the lick of paint that will help to boost rental value. Given it only takes six months to rebuild a warehouse, there seems plenty of time for the company to get prepared for an economic recovery.

Meanwhile, it is trying to boost tenant loyalty, and save a bit of cash, by introducing what it calls B-Serv. Instead of outsourcing the maintenance, security and landscaping of properties, or leaving these services to be organised by tenants, Brixton has found it cheaper to do it in-house. There is some talk that B-Serv could even bid for facilities management contracts from other landlords.

The risks to Brixton's net asset value, which rose 6p to 321p over the first half of the year, would suggest that investors should wait to buy the shares. But they yield a 5 per cent dividend and look likely to withstand any slowdown better than most in the sector. They are a solid hold.

Calmer waters at Mersey Docks

The storm clouds that hovered over Mersey Docks & Harbour are thinning, if not clearing. The UK's second largest port operator saw its shares jump 4p to 559p yesterday on a performance that was rather better than anyone has been predicting since the company's profits warning last December. Profit fell 7 per cent to £27m, partly due to a hefty increase in its insurance premiums this year, but sales rose 7 per cent to £133m.

Mersey's exposure to the depressed North Atlantic cargo shipping industry has hit profits. This has also not been the best year to have struggling UK exporters as some of your largest clients.

In these tough times Mersey has increased its share of the car export and container markets. It has also invested in some exciting new projects, including a new loading terminal in Liverpool and another terminal for a new express shipping line to the Mediterranean.

Mersey's chief executive, Peter Jones, chose "cautiously optimistic" as his view of the next six months. The caution comes from the fact that he expects shipping in the Atlantic to carry on being depressed and UK manufacturers not to be in a position to dramatically increase exports for some time yet. And the optimism stems from the new Mediterranean business, which could put Liverpool on international trade routes stretching to the Far East.

Mr Jones predicts that at least one export business – scrap – will increase by a third due to investment by two major clients to make loading and unloading much speedier.

Analysts bumped up their forecasts for Mersey's full year profits. Up 4p to 559p, the shares are on a forward price-earnings ratio of just under 12, where Mersey trades at an unjustified discount to its larger rival, AB Ports. The attractive valuation, and an ongoing share buy-back programme, make the stock a buy.

Morgan Sindall is still a tasty prospect

Whoops, there goes £6m of profits. Morgan Sindall's interim figures yesterday were a disappointing read, after it botched the reorganisation of its regional construction businesses into a single brand and discovered a handful of loss-making contracts in the process. John Morgan, the founder and executive chairman, says the single bigger brand, Bluestone, is needed to work with UK-wide developers and says he'd do it again, although presumably better.

Pre-tax profit almost halved to £5.9m in the six months to 30 June, but the headline figure masked some pretty impressive growth at Morgan Sindall's three other divisions. In particular, it has built up an impressive business running infrastructure projects for utilities, and there was also continuing growth in the business that fits out existing properties, even as the fit-out market as a whole started to look ropey. The group is a big player in "affordable housing", and almost doubled its order book to £490m. The costs of bidding for private finance initiative contracts has been holding back margins, but the affordability of homes has become a political hot topic and activity in this niche is set to increase.

Mr Morgan promised Bluestone will break even in the second half of the year and group profits – estimated at £18m for 2002 by Seymour Pierce – could balloon next year as a result. The stock, up 9p to 297.5p, trades on just 6 times next year's forecast earnings, making it an interesting recovery play with a tasty dividend.