Shares in Hammerson (LSE: HMSO) are down 10% as I write, after the shopping centre owner confirmed press reports it’s trying to raise cash. Measures on the table include “advanced discussions” on the sale of its European retail outlet business and issuing new shares.
Management also reported that tenants are continuing to withhold rental payments. Rent collected for the current quarter is “over 30%” of what’s due. Hammerson is planning to cover some of the shortfall with a new £300m Covid loan from the government, but this will only add to the group’s sizeable debt pile.
Today’s news suggests management may win some breathing space by selling its European assets. If UK trading improves, I think we could see Hammerson’s share price make a strong recovery from current levels. But, as I’ll explain, this is far from certain.
Hidden value?
Hammerson’s a big player in the UK retail sector. The group’s flagship UK centres include London’s Brent Cross, Birmingham’s Bullring and Bristol’s Cabot Circus. In total, it operates in 14 countries and has 4,800 tenants. Before Covid-19, Hammerson’s centres had 430m shopper visits per year.
According to the firm’s 2019 accounts, its property portfolio was worth £8,327m, or around 601p per share. At a last-seen share price of 58p, Hammerson appears to be trading at 90% discount to its book value.
Buying property at a discount to its book value can be a great way to make money. But there are a few things you need to consider before taking the plunge.
Two big risks
Hammerson was already having problems before the coronavirus pandemic. The value of the group’s property portfolio fell by 16.2% last year as traditional retailers struggled.
Despite this writedown, I think it’s fair to expect further falls this year, given the impact of lockdown. If this happens, Hammerson’s high leverage means its net asset value could fall very sharply.
My sums suggest that if the valuation of Hammerson’s property portfolio falls by a further 15%, net asset value per share would fall to around 430p. If the firm then went on to raise perhaps £1bn by issuing new shares, then I’d estimate the extra shares could dilute this figure to as little as 140p.
Looked at this way, Hammerson stock isn’t quite so cheap at 58p.
Hammerson share price: buy, sell, or hold?
I think Hammerson’s low share price reflects the uncertain outlook for its business. I can’t see any way to predict how well trading will recover in traditional shopping centres.
Rent collection may improve when government measures protecting tenants from eviction expire in October. But we could also see a sharp rise in vacant units at this time, as loss-making retailers shut stores.
Could Hammerson stock return to 300p? I doubt it. If things go well, I could see the shares trading at 100p-150p. But I think there’s also a serious risk that the Hammerson will follow Intu into administration. That would leave shareholders with nothing.
Hammerson shares are too risky for me — I’m staying away.
