Stockwatch: vaccines have rekindled this stock’s hopes

Positive vaccine news has pulled a jaundiced real estate investment trust off its lows, with more good news coming.

Two Covid-19 vaccines with alleged effectiveness of over 90% have re-kindled enthusiasm for hospitality and travel stocks especially, as well as cyclical and highly indebted ones. 

In the latter case, the fear had become that high debts had made it impossible for such companies to trade their way out of a self-imposed corner or manage worthwhile disposal prices.

Shareholders have been at risk of massive dilution if banks took control. But now vaccines present a chance for people to get out and about more actively, the equation is altered.  

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Real estate investment trust Hammerson (LSE:HMSO) is a good example in commercial property, where shopping for non-essential goods, as well as leisure activities, has been substantially thwarted. 

Yet at 26p its stock is up about 50% from lows in the high teens’ pence only a week or so ago. 

Rights issue sets the stage for risk mitigation 

Net debt peaked near £3.5 billion four years ago but has crept down since, while the pandemic prompted more vigorous action. 

Last September, a highly dilutive 24-for-1 rights issue at 15p raised £550 million and a one-for-five share consolidation was also initiated just beforehand. It will certainly temper recovery potential, but the current price may still be below what ‘trough’ valuations for this type of commercial property consist of.  

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With rental reform under way, debt being reduced by disposals and people resuming more activity in a year or so, on current knowledge I target medium-term recovery to continue to a 30p to 40p range. 

That assumes net asset value nearer 50p a share with an extent of discount persisting. A steady uptrend may now persist if perception has turned to risks reducing.

Illustrating how bombed-out Hammerson has become: its market price peaked in 2007 at 520p equivalent then plunged to 105p early in 2009 and had recovered to 315p by early 2015. 

Yet the chart trended down again, and Covid-19 prompted another plunge from about 100p to all-time lows of sub-20p. But despite being in the 90%+ fallers' club it has potential to recover somewhat. 

A recent disposal of a 50% stake in a French shopping villages’ network for £274 million equivalent, boosted total cash proceeds to about £800 million. They cut net debt to £2.2 billion versus a stock market capitalisation now around £900 million. 

Strong asset base in a relatively simple balance sheet

The end-June 2020 balance sheet was relatively simple: various lumpy property assets versus £3 billion debt, only £154 million of which was short-term. 

After selling a 50% stake in VIA Outlets for £274 million equivalent, Hammerson is left with circa £7 billion investment assets and (to what extent 2019 numbers are a guide) a net rent roll of around £400 million.

At the time the geographic spread was roughly 50% in the UK, 30% in France and 20% in Ireland.  

Within £3.4 billion balance sheet net assets there was no goodwill or intangibles. 

Mind, a dilemma with relying on balance sheet valuations right now is whether underlying asset values have fallen, due e.g. to lower rents being collected (as tenants exit or default). 

If the assets are valued on what they might fetch in a fire-sale they would probably be lower than stated as of end-June 2020. However, I would envisage good potential for recovery from trough values now dependable vaccines have appeared. 

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These should let people get out more for shopping and leisure instead of 2020's relentless mixture of online and indoors.

The balance sheet current ratio of current assets to current liabilities was a satisfactory 2.4x. There is no problematic and varying pension fund deficit to grapple with.  

So, compared with other ‘challenging’ balance sheets in UK plc, it should be relatively straightforward to improve Hammerson if disposals can be struck at useful prices.   

Fresh perspectives in key board positions

Changes at the top improve the odds of a value-positive outcome: at end–September both the chairman and chief executive were replaced.  

The new chairman is Rob Noel, formerly of Great Portland Estates (LSE:GPOR) and Land Securities Group (LSE:LAND), who said he looked forward to “helping steer Hammerson through current challenges and capitalise on significant opportunities ahead”.  

The new Canadian chief executive, Rita-Rose Gagné, previously led the growth markets segment of a global real estate company, and another other property specialist has joined as a new non-executive director.  

They must see Hammerson’s situation as workable and able of making value for shareholders despite its high debts and retail property bias. 

Dividends cancelled - then tentatively restored 

Not surprisingly, a final dividend in respect of 2019 was omitted in March and none declared with the 6 August interims.

Then on 11 November the new board announced intent to pay a 0.2p interim dividend to shareholders registered as of 4 December, with an enhanced scrip alternative of 2p per share. 

As I recently pointed out with regard to media group Reach (LSE:RCH) offering a scrip dividend, it is simply bringing forward value to today. 

The cost of holders selling scrip to pocket cash is borne by dilution of long-term holders. So I regard this as a gimmick, although it has not prevented Reach equity coincidentally soaring. 

At least it seems a positive how the board does at least contemplate some extent of payout policy resuming. 

Classic ‘event-driven’ play linked to further disposals

The board has set an objective “to increase the scope of the disposal programme as soon as market conditions stabilise, with the aim of achieving an appropriate capital structure for the long term”. 

For example, two other French assets are estimated to be worth £1.2 billion equivalent, whose sale would also likely cut operating costs. A divestment/cash-raising on such scale could radically improve perception of Hammerson’s risk. The French commercial property market has seen more stable asset prices due to less online retail growth and indexed rents.  

Management intends also to introduce a new leasing model in the UK with more flexible terms and rebased/indexed rents, towards “a sustainable, growing income stream, which in turn will stabilise capital values”. 

Eventual recovery in rental income?

Total 2020 rents will be substantially down – possibly in the region of 30%, and the medium-term trend would appear downwards. However, consensus is for 2021 group net profit around £100 million.  

Click-and-collect options being pursued with clients may enable a fair compromise to be struck that mitigates attrition of shopping centre sales online. 

Hammerson is looking to de-base its UK rents to an index-linked arrangement with a performance-based top-up linked to footfall. This is hoped to improve tenant quality and may mean a change of use, e.g. more towards leisure – hence also explaining the stock’s sensitivity to Covid-19 vaccine news.  

Hard Brexit could yet jolt financial markets

A potential near-term spoiler – or creating an even better buying opportunity – would be the jolt of a no-deal Brexit, with negotiations still apparently deadlocked over fishing rights and state aid rules. 

UK negotiator Lord Frost does appear to be digging in. The dilemma for interpreting odds of the outcome is between Boris Johnson alternating between the underlying liberal I believe he is, and trying to placate Brexiteers he relies on – for his job. 

Even so, I believe Hammerson shapes up nicely as an enterprising speculation. ‘Buy’.  

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.