While commercial property firm SEGRO is up 17%, Morrisons is down 16% and Lonmin shares have fallen by an ugly 99%.
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However, next year’s winners and losers will almost certainly be different. Are Morrisons, Lonmin or SEGRO likely to beat the market in 2016?
I’ve been cautiously impressed with Morrison’s management and financial results over the last year.
Scrapping the M Local convenience stores and launching a low-cost trial in filling station forecourts seems like a smart move to me. Morrisons was too far behind Tesco and J Sainsbury to compete directly, but could do well in the right locations.
The firm’s financials are also improving. Strong cash flow has reduced net debt from a peak of £2.8bn in February 2014 to £2.1bn at the end of the third quarter. A further reduction is expected during the fourth quarter.
Morrisons now trades on 16 times current year forecast earnings, falling to 13.5 next year. The stock offers a 3.5% prospective yield and is currently trading at its book value of 152p. Unless you believe Morrisons will fail to make any further progress, I believe the shares look good value.
SEGRO’s decision to refocus its portfolio on high-quality logistics properties always seemed smart to me. It seems to be paying off and the shares have climbed by 77% over the last three years.
SEGRO is a real estate investment trust (REIT). This means it has to pay out 90% of its tax-exempt profits to shareholders in the form of dividends. SEGRO’s profits from lettings are fairly stable, as you’d hope, and generally rise with inflation.
The firm’s dividend payments have reflected this, rising by 2%-3% per year since at least 2009. In my view this attribute makes the shares a good long-term income buy, even at today’s fairly average 3.6% yield.
However, I’m not sure shareholders will see a repeat of the big capital gains of the last three years. SEGRO’s discount-to-book value has been erased and the shares now trade slightly above book value. This suggests to me that the stock is already fairly valued, unless the underlying value of its assets continues to rise.
Bargain… or bust
Lonmin’s recent $407m rights issue created 46 new shares for every one original share. This meant that shareholders who didn’t choose to participate saw the value of their stock fall by 98%.
However, this was Lonmin’s third rights issue since 2009. Only 70% of the rights were taken up. The remaining 30% were placed with the Public Investment Corporation of South Africa. This is a publicly-owned business, so Lonmin has effectively been part-nationalised.
Lonmin shares have fallen by about 40% since the rights issue shares began trading and are now worth about 0.7p. That’s around 80% less than the post-rights issue book value of 3.8p per share. This could be a serious bargain.
If Lonmin can deliver a successful turnaround, these shares could easily double or triple in value. However, there’s also a chance that Lonmin will finally fail, leaving shareholders with nothing.