This Neil Woodford value stock is trading at a big discount

Roland Head looks at the buy case for two high-yield property stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Property stocks have suffered very mixed fortunes since the Brexit referendum, but I believe some companies in this sector are now quite attractively valued.

In this piece I’m going to look at two potential buys — a small-cap upstart and a big name property stock with a long pedigree.

Rapid growth

AIM-listed Palace Capital (LSE: PCA) has delivered rapid growth since its flotation in 2013. The reported value of its property portfolio has risen from around £60m in 2014 to £183.2m at the end of March.

News today suggests that this value could soon head north of £200m. Palace has announced plans for a £67.8m deal to acquire RT Warren, a property company with a £71.8m portfolio of industrial and residential properties.

Palace plans to raise £70m through a share placing to fund this deal. The group’s plan is to sell the London residential properties and focus on improving the rental yield from the commercial properties.

There are several things I like about this. The first is that by raising the whole value of the deal in fresh equity, management expects to deliver a significant drop in leverage. The group’s loan-to-value ratio is currently quite high in my view, at 43%. But if the RT Warren deal goes through as planned, this is expected to fall to less than 35%.

The second thing is that the RT Warren assets generated a rental income of £3.6m last year. This gives a rental yield of about 5%, which is below the group’s average. However, management believes a number of the new properties have the potential to deliver higher returns.

Palace’s special focus is on active management to maximise rental yields. So far, it’s been quite successful. Net asset value per share rose by 7% last year, while adjusted pre-tax profit rose by 20% to £6.7m.

The shares currently offer a yield of 5%. For small-cap income investors, they might be worth a closer look.

A 35% discount

FTSE 100 property group British Land Company (LSE: BLND) has a £13.9bn portfolio that’s focused on prime London office space, and retail centres around the UK.

Neil Woodford has been buying British Land stock for his income funds, most recently in August. And although some of Mr Woodford’s picks have come in for a lot of criticism this year, I believe this one makes sense.

The stock currently trades at a 35% discount to its net asset value of 915p, and offers a forecast dividend yield of 5.1%. British Land is well funded and the portfolio has a loan-to-value ratio of less than 30%, which seems fairly prudent.

The group doesn’t need to refinance any of its borrowings until early 2021 and has a weighted unexpired lease term of 8.3 years. Occupancy stands at about 98%.

One risk is that some of the group’s major tenants — perhaps retailers — could fall into financial distress and default on their rent payments. However, despite this possibility, I think it’s fair to say that forward visibility of earnings is pretty good.

In my view, the stock’s discount-to-book value is large enough to provide some protection against falling prices and lower rents. British Land has been on my watch list for a while. I’m certainly getting closer to making a purchase.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended British Land Co. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

The Diploma share price looks like it’s hit a ceiling. What can we expect in 2025 and beyond?

After the weak results last month, analysts are no longer optimistic about Diploma's share price. Our writer considers its future.

Read more »

Investing Articles

I’m backing these 2 UK shares to soar again next year

Harvey Jones is excited by the market-beating performance of these two UK shares in 2024. Now he hopes they can…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Down 92.5%, is NIO stock the multi-bagger we’ve all been dreaming of?

Could NIO stock surge 100% over the next 12 months and become another multibagger? Dr James Fox takes a close…

Read more »

Investing Articles

An 8.6% yield, but down 19%! Is it time for me to start earning passive income by buying shares in this FTSE 250 REIT?

Is a reliable 8.6% yield enough to make this FTSE 250 real estate investment trust one of the best dividend…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Is the Diageo share price set for a blockbuster comeback in 2025?

Harvey Jones was happy to see the Diageo share price rise yesterday. It feels like the first time in ages.…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

Should I buy Helium One, possibly the FTSE’s ‘most popular’ share?

After doing some number crunching, our writer’s identified what he believes to be one of the FTSE’s most favoured stocks.…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Growth Shares

Here are the FTSE 100’s best performers over the last 5 years

Since 2019, some FTSE 100 shares have risen spectacularly. Here’s a look at the best performers in the index over…

Read more »

Investing Articles

I could have bought BAE Systems shares for my SIPP but I invested in this defence ETF instead

Edward Sheldon just put some capital to work within his SIPP, buying an ETF that provides broad exposure to the…

Read more »