The directors are betting the house at St Modwen.
The recent stock market weakness hasn't inspired the wave of director buying we saw this time last year. Perhaps company directors feel the equity rally had got ahead of itself. Or maybe they're as scared of the unfolding Greek tragedy as everyone else.
Three senior managers from St Modwen Properties (LSE: SMP) have however increased their holdings in the company they run this week, on the back of full-year results that revealed another thumping accounting loss but offered some hope for the future.
St Modwen shares soared threefold in the 'Dash to Trash' rally of spring 2009, climbing from a nadir of merely 68p. They've since fallen steadily from a high of 262p in August, with the three directors making their buys on Tuesday at 189p -- 27% down from that August peak. The shares cost over £7 in 2007.
| Director | Position | New buying | Total holding |
|---|
| William Oliver | Chief executive | £106,845 | £696,893 |
| Steve Burke | Construction director | £61,463 | £271,929 |
| Tim Haywood | Finance director | £43,900 | £354,478 |
While these new buys represent a fraction of the directors' total holdings, they're all non-trivial sums -- significant purchases from three directors well placed to know how St Modwen is really faring.
Big losses in 2009
Investors in St Modwen will certainly seize on any evidence of confidence for the future, because the recent past has been awful.
The full-year results to the end of November 2009 saw pre-tax losses increasing, from a £73 million loss in 2008 to £119 million (the company preferred to flag up its trading profit of £8.4 million, which ignores non-cash revaluations and writedowns).
Net asset value (NAV) fell 20% to 200p per share, after taking into account the rights issue in May 2009. That discounted rights issue, which saw investors inject a shade over £100 million into the company at 135p per share, enabled St Modwen to reduce debt and renegotiate its banking covenants.
Together with property sales worth around £100 million in 2009, net debt is down to £315 million from £422 million, which the company equates to 80% gearing with respect to its revised banking covenants:
- gearing must not exceed 175% (currently 80%);
- net assets must be greater than £250 million (currently £401 million); and
- interest cover (excluding non-cash movements) must be greater than 1.25 (currently 1.7)
Excluding non-cash movements (such as the £107 million mark down in St Modwen's near-£1 billion investment property portfolio) from the interest cover equation makes sense because these revaluations don't impede the company's ability to pay interest from earnings. They do of course increase the risk for its lenders, which is why such movements are caught by the net asset covenant.
The only way is up?
Thanks to the rights issue, St Modwen looks more secure than it did this time last year, but clearly it can't take many more £100 million writedowns before risking its covenants again. The investment case therefore comes down to whether you think further big losses are likely, or indeed if upwards revaluations are on the way.
There's some hope for the latter. Of the 20% reduction in NAV over the year, just 4% was incurred in the second half. The recovery in house prices is well documented, and St Modwen has over 20,000 plots in its land bank that it didn't need to revalue in the latter half of the year -- indeed, it's presently selling four blocks at or above their book value as of November.
Elsewhere in its portfolio, rental income from existing properties actually increased slightly in 2009, and while St Modwen admits it's yet to see the NAV revaluations other commercial property companies have enjoyed, it notes: "We are achieving transactions that underpin our current valuations. This leads us to believe that future valuation movements are more likely to be positive than negative."
Development, development, development
St Modwen's directors must be waiting for the day when attention moves away from the minutia of marketwide NAV drops and back to St Modwen's speciality -- adding value through development.
This isn't a traditional commercial property company in the Land Securities (LSE: LAND) sense, but rather a specialist in urban regeneration and brownfield reclamation on a massive scale.
For instance, it's working on transforming a 2,500-acre oil refinery formerly owned by BP (LSE: BP) in South Wales into a new commercial and housing complex. The work will take at least two decades, with the project's value estimated at £3 billion. At 186p, St Modwen's shares offer no great discount to that NAV of 200p, but such brownfield smarts commanded a premium before the slump.
The shares traded at 40% above NAV as recently as 2007, reflecting how confident investors were St Modwen would add value to its landbank. Wider market factors may have derailed such optimism, but I wouldn't discount St Modwen doing it again, assuming the UK returns to growth.
The company grew its NAV ten-fold in the decade following the 1990/91 housing recession -- a stunning result for brave investors.
Should you follow the directors?
For what it's worth, St Modwen is currently trading on a forward P/E of 20, with analysts expecting the resumption of the dividend to give a yield of 1% for 2010. But such figures are fairly meaningless in the context of commercial property's return -- or otherwise -- from the grave.
The reason that the sector -- especially its more entrepreneurial constituents like St Modwen and Fool board favourite Quintain Estates (LSE:QED) -- keeps being debated is because it still offers a 'fear discount', in contrast to the wider market, which has arguably already priced in an economic recovery.
A further risk is a big reduction in taxpayer-funded work, which could offset the advantage of cheap sales of land from the same government desperately looking to raise cash.
With the UK outlook still murky, not least due to the upcoming general election, backing St Modwens means buckling in for a turbulent ride. Nevertheless, if you believe we've shaken off recession for the foreseeable future, then following St Modwens' directors now could prove a very profitable move in years to come.
More from Owain Bennallack:
Owain holds shares in Quintain Estates.
