Shaftesbury plc: Great assets, but over-valued?

Posted on 25/01/2011


Seven Dials by Steve Parkinson, via Flickr

Shaftesbury plc (SHB) is a real estate investment trust which owns freeholds on more than 500 buildings of prime London property, including much of Chinatown, the Carnaby Street and Seven Dials shopping “villages”, property in the Covent Garden Opera Quarter, St Martin’s Courtyard and on Berwick Street in Soho. These areas form key sections of London’s shopping and entertainment districts which attract locals and tourists alike. In FY10 the company earned revenues of £71.2m (+5%), operating profit of £49.4m (+3.4%) and net profit of £167m, the latter driven by a 14.2% increase in the capital value of the group’s properties.

Rental revenues have historically tracked – with a four-year lag – rent reversion estimates (an indication of rents that the properties might earn if they were all let on new contracts today) provided by the property valuers. At present, the valuers estimate the reversionary value is £83.9m compared to current contracted rents of £68.3m, giving arise to a potential 23% rental increase over the next few years. In addition, upon the release of FY10 results, management delivered a very confident outlook statement, saying that: “demand for all of our uses in each of our villages is strong, which is reflected in increasing rental values and an historically low level of vacant space in our portfolio. We expect strong occupier demand for our properties to continue, and we are confident that we shall maintain our record of delivering out-performance in income, dividends and capital values.

These positive circumstances are, a certain extent, already priced into Shaftesbury shares. These trade at 1.2x net asset value, 37x FY11E earnings and quite a low dividend yield of 2.2%.  Consequently, in return for a relatively high degree of certainty about future dividend growth, investors are willing to accept a lower yield.

I believe that Shaftesbury plc owns a collection of first-class retail assets in the centre of London, and consequently should be able to increase rents and maintain high levels of occupancy over the long-term due to the unique characteristics of these particular areas.

Also, Shaftesbury shares should act as a good hedge against rising inflation, given the ability of the company to raise rents in real terms while facing interest payments in nominal terms. However, we do note that Shaftesbury shares are expensive relative to earnings, so this strong position is priced-in by the market, meaning a high rate of real-terms capital growth is unlikely. Therefore, I see the shares as most suitable for those who seek an inflation-hedged, rising dividend stream.

Bull Points

  • Shaftesbury owns high-quality real estate in some of London’s most attractive shopping and entertainment districts, making it likely that the company will be able to increase rents over the long-term.
  • The shares should offer protection against inflation, as Shaftesbury should be able to raise rents in real terms, while the company’s debt will remain in nominal terms.

Bear Points

  • The company is reliant on retailers for much of its income. The fiscal tightening in 2011 is likely to impact the sector, though prime West London property may be somewhat immune.
  • The shares look expensive, trading at 116% of net asset value, a low dividend yield of 2.2% and 37x forecast FY11 earnings.
Posted in: Investment Ideas