St Modwen stranded in land of the lost

St Modwen, the mid-cap property developer, makes much of its long-term returns — whether profits, dividends, or capital growth.

But its short-term returns leave a lot to be desired. The dividend has gone — part of the same self-preservation strategy that underpinned last year’s £107 million fundraising — and yesterday’s full-year results show St Modwen falling to a £101.7 million post-tax loss, the biggest in its 24-year history.

Neither does the most recent performance of its portfolio provide much relief. Whereas the wider commercial property sector enjoyed a recovery in valuations in the second half of last year, St Modwen is still in reverse.

Its net asset value (NAV) per share fell a further 4 per cent to 200p in the six months to November 30.

St Modwen’s problem is that strong investment demand has created a two-tier UK property sector in recent months — London and “prime” sites, versus the regions and “secondary” locations — and the Birmingham-based company is very much in the lower half.

Its tactic is to buy cast-off assets and enhance their value — typically buying industrial land, cleaning it up, obtaining planning permission and selling it on to housebuilders — but that niche has suffered at the expense of already-built, occupied properties with strong underlying demand that generate reliable income.

So it is that, while sought-after sites at Mayfair in London have been changing hands at implied yields of below 5 per cent, much of St Modwen’s porftfolio is nudging double digits.

Its retail assets — which include the Elephant and Castle shopping centre in South London — now stand on a yield of 9.9 per cent.

Not all of yesterday’s figures were bad. The company’s rental income rose 5 per cent on the year to £43 million, which, combined with a reduction in overheads, meant that St Modwen was still able to make a full-year trading profit, which is more than can be said for most housebuilders.

It also disclosed that it had planning permission, or is close to receiving planning permission, on 20,000 plots of land — which, as Numis Securities pointed out, is 7,500 more than Bovis Homes, which has a higher stock market value.

St Modwen has a finely honed model for processing land that has seen it through previous property cycles, and it should work again. However, with rises in NAV still six months away, and no dividend expected before 2011, at 188½p, there will be better times to buy.

Randgold Resources

The drawback of gold is that it produces no income. London’s largest listed goldminer is little better. Even after yesterday’s 30 per cent increase in its annual payout, Randgold Resources still sits on a dividend yield of only 0.24 per cent.

But it is capital growth that is the bigger draw and on that measure — up 3,910 per cent during the Noughties, making it the FTSE all-share’s single best performer — Randgold has not disappointed.

The shares headed higher again yesterday on figures that roundly beat forecasts. Gold sales were $139 million (£89 million) in the last three months of 2009, up 78 per cent year-on-year, with full-year diluted earnings per share coming in at 84 US cents, against the 73 cents that the stock market had been expecting.

The fillip was provided by the flagship Loulo project in Mali, which enjoyed record production in December after the company replaced the external mining contractor underground.

Randgold’s performance below ground has been poor relative to its open-pit activities and, given that so much of the group’s development portfolio will be exploited by sub-surface mining, that improvement is encouraging.

So, too, is the better-than-expected 60 per cent increase in Randgold’s attributable reserves to 14.2 million ounces — thanks to its Massawa project in Senegal and Kibali in the Democratic Republic of Congo, due to start production in 2014.

Randgold’s capital expenditure will not peak until 2012 (at about $380 million) and Kibali is logistically complex: it requires the company to rehouse around 15,000 people.

However, Randgold’s historically high operating costs should continue to fall, while $590 million of net cash gives it plenty of room to manoeuvre.

At £44.80, up 271p, hold on.

Kofax

Barely more than a week after it had secured its biggest contract so far, yesterday’s first-half results from Kofax — a developer of software that digitises paper documents — provided further signs of progress.

Sales were up 17 per cent in the six months to December 31, or a still-respectable 7 per cent once the boost from the $33 million (£21 million) purchase of America’s 170 Systems in September is stripped out.

The strategy of Reynolds Bish, chief executive at Kofax, has been to sell more of its software direct to large users, rather than through third parties, and the tactic is working.

Average contract sizes have risen from $15,000 to $250,000 in two years and direct sales account for 43 per cent of the total, within sight of its 50 per cent near-term target.

The bind is that Kofax’s low-margin hardware division remains a drag on the whole.

It made lower-than-expected first-half operating profits of $2 million on sales of $48 million — forcing analysts to leave Kofax’s current-year forecasts on hold.

The relief is that Mr Bish intends to sell or restructure it before the end of the year.

The broader attraction is that Kofax’s software falls under the category of applications that generate a short-term return on investment (it automates manual procedures, such as invoice processing), which should underpin further sales from cost-pressured corporate and public sector clients.

At 194p, or 13 times next year’s earnings, tuck away.

Nick Hasell, The Times 09-02-2010

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Nick Hasell, The Times

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