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Canary Wharf looks good despite property jitters in the City

Booming salad sales put rocket up Geest; Best to steer away from Trafficmaster for now

Friday 13 September 2002 00:00 BST
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The market is jittery about investing in property shares, worried that tenants are drying up and rents are suffering, as a result of the economic slowdown. This is certainly apparent in the City but shares in Canary Wharf Group, which reported interim figures yesterday, have not been immune from these concerns.

Canary Wharf, which has developed and owns the massive office development in London's Docklands, has seen its shares fall steeply since May. Yesterday's results were greeted with a further 5 per cent drop in the stock to 387p. The immediate cause of this was the fact that the company missed earnings forecasts after reporting higher-than-expected interest charges.

Nevertheless, progress on profitability for this once bankrupt company is obvious. For the year ended 30 June, pre-tax profits jumped to £203.1m, from £42.5m, though this was mostly due to exceptional items. Net realisable value – or the value of the estate fully built out – was put at 683p a share, while the current open market value of the properties is 390p a share – putting the stock on a considerable premium to the property sector.

Canary Wharf is still very much in the development phase and even some of its completed buildings are not yet bringing in income. But once the estate is fully occupied in the next three or four years, the huge rise in revenues, which come from rents, will see profits rise exponentially. The company's confidence and its continuing ability to draw in tenants can be measured from the fact that yesterday it brought forward the first tranche of a special dividend. This will see investors paid £375m or 64p a share this December.

Canary Wharf has committed itself to return £2bn to shareholders over the next three years, through a combination of share buybacks and special dividends. That's a great payback for a company whose market capitalisation was £2.3bn when it floated in 1999.

Potential tenants still appear to be interested in moving to Canary Wharf and those occupiers already there are locked into leases with an average of more than 20 years to run, with upward-only rent reviews. So there appears to be nothing fundamental to worry about and, with the finished estate potentially worth some 700p a share, the shares are a buy.

Booming salad sales put rocket up Geest

Everyone rues the passing of their salad days. And none more so than Geest, which relies on posh bagged salads to buoy sales of its chilled convenience foods.

A shock warning in late June that the poor British summer had put shoppers off the green stuff knocked Geest off its former stock market pedestal. The shares are barely two-thirds of their 825p peak before the "blip" and the market has woken up to the potential for cyclical trends upsetting what had been unfettered growth.

Happily for investors who were wrongfooted by the warning, Geest signalled a return to its former innocence yesterday after bagged salad sales soared by 20 per cent in August. This was after a 12 per cent fall in May and no growth in June, which the company now ascribes equally to trading hiccups after the World Cup and the Queen's golden jubilee and the damp weather.

Fundamentally, Geest remains a tasty bet. It cottoned on early to changing consumer habits – more working mums, more people living by themselves, more time pressures generally – and stepped in to feed a busy nation. Hence, it supplies the UK's major supermarkets with more than 2,000 different meals and snacks, from pizzas to desserts, fresh bread to filled pasta. After years of heavy investment in new factories, the company intends to settle down and concentrate on improving its return on capital – although it will keep up the rate of innovation that saw it flood our fridges with 300 new products in the first half.

The City still likes the management team, which has seen Gareth Voyle step up to chief executive from chief operating officer and Sir John Banham join as chairman, as well as the company's 10 per cent dividend hike. Pre-tax profits for the six months to end-June were £18.2m, up from £17.7m, while turnover including its share of joint ventures was 16 per cent higher at £389m.

Investors would do well to follow Sir John's example and buy some shares, up 17.5p to 540p yesterday, while the rating remains an unstretching 13 times earnings.

Best to steer away from Trafficmaster for now

While results from the traffic information provider and traffic products company Trafficmaster did not make pleasant reading, at least the numbers are going in the right direction.

And that is no mean feat for a company with a history of profit warnings. Losses in the six-month period narrowed substantially while sales were 73 per cent better than the same period in the previous year.

In the six months to 30 June, the company made a pre-tax loss of £4.9m compared with a loss of £8.1m last year on sales of £18.7m, up from £10.8m – in line with analysts' expectations.

Better still, the company reckons its recovery remains on track and predicts losses in the second half of the year should be lower than those recorded in the first half.

It was also reassuring to hear the company's cash pile, of about £7m, should be sufficient for "all anticipated requirements". The company's US arm, Teletrac, has $15.5m (£10m) in long-term borrowings that are repayable in October 2004.

And the company has high hopes for new products. It recently launched Smartnav, a cheaper vehicle navigation system which it hopes could become a mass-market product. Such systems are currently only featured in the luxury end of the car market.

For now, though, trading remains difficult and the company admits that the European marketplace in particular is still developing far more slowly than forecast.

With that in mind, there seems no obvious catalyst to send the shares much higher in the short term. On that basis, the stock, up 1p at 18.75p last night, is probably still best avoided for now.

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