Croesus/An insider's view of the market:Last week the UK property company, British Land, released eagerly awaited financial results for the three months to the end of December 2007.
British Land is one of only two quoted UK property companies that produce quarterly results. It has a market capitalisation of £5.16 billion (€6.96 million), making it the second- largest UK-quoted property company behind Land Securities, which has a market capitalisation of £7.76 billion.
Given the recent sharp decline in UK property, these results attracted much greater scrutiny than usual as they provide an up-to-date snapshot of conditions in the UK commercial property market.
Before the British Land announcement, the Investment Property Databank reported a 2007 fourth-quarter decline in capital values of minus 8.6 per cent, which was the highest quarterly decline since its inception.
British Land's results corroborated the extent of the fall as its portfolio was marked down by minus 8.9 per cent in the three months to the end of December 2007. From March 2007, the company's property portfolio declined by £1.4 billion to £14.6 billion at the end of December.
For property companies, the key valuation yardstick is net asset value (Nav) per share, and this declined by 16.7 per cent to 1,401p. This compares with a current share price of 970p, which represents a 30 per cent discount to the stated Nav per share. This is 45 per cent below the 12-month share price high of 1,748p. It is worth noting that at its peak the shares were trading at a premium to the March 2007 Nav per share of 1,682p.
Property share prices tend to move very quickly in response to changes in underlying property market trends. When times are good, share prices trade close to underlying Navs.
However, once expectations shift towards a weaker property market share prices often tumble rapidly, leaving them trading well below stated Navs per share. The current persistence of a large discount to Nav in property company shares implies that UK property values have further to fall.
This is now recognised in the market but it will require new transactions to take place in coming months before the true level of the underlying property market can be established.
In his statement accompanying the results, chief executive Stephen Hester said: "Asset values have not yet fully completed their adjustment though recent sales and properties 'under offer' are encouraging and supportive of the value now reflected in our portfolio."
What has surprised most observers is the speed at which UK commercial property prices have fallen. For the first half of 2008, further falls in commercial property values are now inevitable.
However, the share price of a well- managed company such as British Land looks like it has fully discounted a further substantial fall in asset values. In fact, the shares have bounced 18 per cent from their recent low of 818p, and although Nav per share is likely to decline further, the 30 per cent share price discount to Nav provides a cushion of comfort to investors. Croesus takes the view that on any weakness the shares offer excellent long-term value.
On the Irish market, Smurfit Kappa announced 2007 fourth-quarter results on Wednesday. Smurfit Kappa is a world leader in paper-based packaging with a leading position in Europe and a strong position in Latin America.
The company has sales in excess of €7 billion with more than 40,000 employees, operating in more than 30 countries. It is the European leader in containerboard, corrugated and solid-board packaging and has a key position in several other packaging and paper market segments, including graphic board, sack paper and paper sacks.
The group reported operating profits of €275 million, which was a little better than analysts' forecasts.
However, judging by the 4 per cent fall in the share price on the day, investors were disappointed with the figures and it would seem that they gave more weight to the modestly cautious outlook statement.
In the fourth quarter, conditions in Europe were slower than expected although management still expects to achieve modest growth in operating profits in 2008. The company is still carrying net debt of €3.4 billion but it is generating substantial free cash flow that will enable it to continue to pay down debt gradually during 2008. At the current price, the shares are at substantially less than half their 2007 peak and are trading on a lowly historic price/earnings ratio of approximately 7.5.
The difficult business climate means that it is hard to see a catalyst that would generate enthusiasm for the stock. Nevertheless, the stock looks very cheap relative to the international paper sector and does offer value at current levels.
