St Modwen a favourite for bargain hunters

St. Modwen Properties had to reduce the value of its portfolio last week, which led to downgrades to its target price, yet the shares stil trade at a 50% discount to net asset value (NAV). With London sentiment favouring markets Monday, value-hunters have piled in.

The property developer's first-half results weren't all bad: shareholder equity NAV per share rose 2% to 421p in the six months to 31 May and a£34 million trading profit is more or less in line with last year's record. Cash jumped 13% to £4.5 million, which has provided wiggle room for a 2% increase in the interim dividend to 1.94p per share.

But pre-tax profit slumped from £206 million to just £30 million this year after a £21 million write-down to its New Covent Garden Market and management £13 million Stamp Duty Land Tax charge. Last year's number also benefited from a £128 million valuation gain on its Nine Elms development.

St Modwen has a number of important projects in development, namely the market and the Nine Elms residential development on the South Bank of the Thames. It also has student accommodation in Swansea and the second phase of its town centre development in Birmingham. Within its £1.7 billion portfolio, its commercial land and development is worth £157 million, the group owns £738 million of residential land and also £804 million of development and income producing properties.

But it's sentiment towards the Nine Elms joint venture (NCGM) that drives share price sentiment and many think management will have to sell it before the shares rerate - this has likely been pushed back due to the Brexit fallout.

"Price risk at NCGM is higher post-Brexit, but the product has value and weaker Sterling makes it more attractive to an overseas buyer," says Liberum analyst Gareth Phillips. "With rents covering costs and a modest [loan-to-value] the risk is comfortable."

Upgrading its results after the stronger-than-expected results, broker Stifel has upgraded 2016 earnings by a fifth to 25.4p, 2017 earnings by 23% to 26.3p and has given its 2018 earnings a 28% boost to 27.3p. However, a worse outlook for the UK commercial property sector has pulled net asset value forecasts down 2% to 445p, its 2017 guidance down 3% to 445p and its 2018 measure by 4% to 445p.

Suffering at the hands of a severe and drawn-out sell-off, St Modwen collapsed as much as 56% from its August high of 490p, before the latest influx of equity. The shares have jumped 17% to 255p in just three trading sessions, although they are still worth nearly half of what they were last August. Trading on under 10 times 2017 earnings, the valuation looks undemanding. Investors will hope this signals the beginning of its long-road to recovery.

Trading at a 43% discount to its 445p net asset value, there's plenty of value to unlock here, although it will take time, Phillips warned. The analyst has cut his target price from 400p to 360p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.