Shares in Derwent London (LSE: DLN) moved to eight-month peaks in Tuesday trading despite the release of a mixed trading update.
Derwent announced that net rental income rose 5.2% last year, to £145.9m, with lettings hitting record levels of £31.4m.
But this was not the only ray of good news, Derwent also announcing £327m of property disposals above book value today. This has encouraged the business to hike the final dividend by 25%, to 38.5p.
The City expects earnings at Derwent to pick up the pace in 2017, a 14% rise currently anticipated. But the good news does not stop here as a further 12% advance is chalked in for next year.
These projections do create expensive P/E ratios, however.
For this year the capital-focused office developer deals on a multiple of 32.2 times, shooting above the benchmark of 15 times widely considered to be conventionally-attractive value. And despite the double-digit earnings rise forecast for 2018, the ratio remains high at 28.8 times.
And I believe these figures are too lofty considering the huge political and economic shockwaves that could hit the British economy looking down the line.
Derwent commented today that “we expect much of the current economic uncertainty to persist as UK-EU negotiations are likely to be protracted,” adding that “how this impacts on London businesses remains to be seen but, so far, activity has been surprisingly resilient with UK economic activity improving in the second half.”
With the business already witnessing a slowdown in demand in office space in 2016, I reckon Derwent’s high multiples could prompt a painful share price reversal should this trend worsen in the months ahead.
In orbit
Derwent London’s results have been thoroughly eclipsed by Meggitt (LSE: MGGT) in Tuesday trade, however, the aerospace giant last dealing 13% higher on the day following a splendid set of financials.
Meggitt announced that revenues soared 21% during 2016 to £1.99bn, a result that helped underlying pre-tax profit advanced 13% to £352.1m. On an organic basis revenues edged 1% higher in 2016, driven by robust demand for its parts and aftermarket services at the Civil Aerospace division.
Meggitt’s strong order book should give investors confidence that sales can keep on flying, too. The company saw orders rise 22% last year, to £1.99bn, thanks to favourable currency movements and the acquisition of Cobham’s composites business. On an organic basis new business clocked in at 3%.
And having bounced back into the black last year, City brokers expect Meggitt’s top line to continue chugging skywards.
A 4% advance is pencilled in for 2017, resulting in an ultra-appealing P/E ratio of 12.9 times. And predictions of an extra 5% rise in 2018 drives the multiple to an even-better 12.2 times.
I reckon this is a steal given that defence spending is back on the mend — Meggitt noted that “the outlook for defence expenditure in the US, our single most important military market, looks more positive than it has done in recent years” — and the firm’s position as a critical supplier to the world’s biggest plane builders allows it to capitalise on rising build rates of civil aircraft.
