Tony Yarrow highlights three opportunities for investors.
As the final act of the Brexit saga approaches, investors are still locked in a state of perpetual uncertainty. We cannot know what will unfold, but what businesses are continually telling the government is how difficult is it to plan in the current environment. Brexit is the moment when we will receive some clarity, for better or worse, and UK company managers will once again be able to start making plans.
While no one knows what is going to happen, we do know what has happened. Over the past three-and-a-bit years, sterling has continued to fall, putting ever greater pressure on the UK economy, which relies to a large extent on imports. Just how cheap some of these assets have become is astonishing. Many have fallen in value by 50% to 75% from their pre-Brexit levels.
The disconnect between the valuations of “cyclical” assets and the rest of the market worldwide is already at an historical extreme, but it is at its most striking in the UK. While our mandate allows us to avoid the UK, the reason that we have chosen to take an overweight exposure is owing to the growing disconnect between our estimates of the value of UK assets and prevailing market valuations.
We are also attracted by the high rates of dividend yield on offer. Below are three UK opportunities, from retail to construction, that we believe are victims of an overly pessimistic market.
Retail: New River REIT
New River REIT owns retail parks and about 600 pubs. Aware of the threat from online retail, the managers identify successful retailers as those that can offer convenience, value or service, and actively look for tenants that demonstrate these qualities.
Retail assets have become so cheap now – well below the cost of rebuilding – that new investors are being attracted into the sector. New River offers a third-party management service to these new owners and has signed three management contracts in the past few months. About 96% of the company’s floor space is let.
New River REIT is astonishingly cheap. At the time of writing, the net asset value per share is £2.61, while the share price is £1.52. The net asset value per share is the amount that would be realised if all the assets were to be sold, and the debt paid off.
The valuation of New River REIT can be explained in part by the current antipathy towards UK assets, and to retail property in particular, and in part by the fact that Woodford Investment Management, until recently a holder of 20% of the company’s issued shares, is said to be selling its holding.
Insurance: Legal & General
These days, Legal & General makes most of its profits from pensions, mainly company pensions. The company is the UK leader in pension risk transfer (PRT), where an insurance company takes over the management of a company’s pension fund. This is a large and growing business.
L&G wrote £6.7 billion of new PRT business in the last half-year, including the transfer of the Rolls-Royce scheme, at £4 billion, the UK’s largest ever. So far, only 8% of UK company pension assets have been transferred to insurance companies, so the potential remains vast.
L&G’s other world-class business is the management of tracker funds, which it has grown rapidly in the past decade. L&G is the world’s 15th largest asset manager. In the past five years, the international fund management business has grown its assets at 28% per annum compound.
The company is also growing in other areas – lifetime mortgages, housebuilding, lending to small- and medium-sized companies and infrastructure development.
From 2011 to 2015, the company grew its earnings by 10% per annum, and since then, the rate of growth has accelerated to 11%. As the share price has stayed flat, the dividend yield has grown steadily to its current level of 7.7%. This is nearly 30 times the return that you could expect from the five-year government bond, Treasury 5% 2025.
Construction: Henry Boot
Henry Boot has been in the TB Wise Multi-Asset Income portfolio continuously since 2012 and it is a company that we have gotten to know well. The company’s share price has fallen more than 35% since the start of 2018, driven entirely by adverse sentiment, as there has been no bad news.
Henry Boot’s principle activity, Hallam Land, takes development land through the planning process and then sells it to housebuilders. Over the years, the land bank has steadily grown in size and the acreage sold has increased every year. Despite Brexit, demand for new houses remains strong, and sales of land continue at a high level.
On the construction side, Henry Boot avoids large and unprofitable contracts. It builds development properties, always either pre-let or pre-sold, and undertakes construction work for third parties. This work is of a very high standard.
Recently, Henry Boot was awarded Phase 2 of a development called The Glass Works in Barnsley. Henry Boot’s hous-building subsidiary, Stonebridge Homes, serving the area between Leeds and York, has grown from nothing in the past few years to now selling about 150 houses a year. The build quality is high and the company can sell as many homes as it develops.
A combination of Brexit and a wider global market panic have pushed Henry Boot’s share price down to its current depressed level.
Apart from the very short term, the fair market price for the company’s shares lies in the region £3.50 to £4.25. A considerable potential upside from the current price of £2.45.
Tony Yarrow is co-portfolio manager of the TB Wise Multi-Asset Income fund.