US Edition Primary Health Properties
304p -½
Questor says BUY
The real estate investment trust (REIT) builds and manages doctors' surgeries and pharmacies on long-term contracts. The rents from these assets provide financing to grow the portfolio and a dividend to investors. It's all about slow and steady progress. This can be seen in the relative stability of its share price over the last year, which only dipped during the broad market sell-off in August.
Indeed, the dividend is the main reason for investors to hold the shares. The prospective yield in the current year is a very attractive 5.9pc, rising to 6.1pc next year. The company has a consistent history of increasing payments to shareholders – and long-term holders are likely to see capital appreciation too.
The biggest single issue for the sector at the moment is the Health and Social Care Bill, the progress of which has been slow. This is delaying investment decision by the likes of PHP – but hopefully the Bill will make the statute book early next year.
Harry Hyman, the owner of Nexus Healthcare, which manages PHP, has always said that the changes should provide an opportunity for the company – when they are eventually agreed – as they are likely to benefit front-line health provision.
"The directors feel that the Bill reinforces the Government's commitment to ensuring that primary care is delivered from modern purpose built accommodation that is fit for purpose and environmentally efficient," PHP said last week. "The board expects the creation of Clinical Commissioning Groups to facilitate further care moving into local services and sees development activity increasing as the new NHS management structures are bedded in through 2012."
PHP has received confirmation from a member of the healthcare ministerial team that in the future the NHS Commissioning Board will be responsible for the reimbursement of GP premises' costs. PHP said it regarded this move as "a positive development".
Aside from those issues, there was plenty of good news in PHP's statement. The portfolio continues to be fully let and the annualised rent roll increased by 3.8pc between June and September. Also, initial property yields in the portfolio have remained stable at approximately 5.75pc in the third quarter.
The next revaluation of the group's property will occur at the end of December. At June 30, net asset value per share was 317.8p, so the shares are currently at a discount of about 4pc to this level.
The company does have debts of £277.8m – and is working on refinancing debt that is due next year.
The group has had some success recently unveiling a new £75m, seven-year, interest-only facility from Aviva.
Refinancing of the rest of the debt should not be a problem because of the asset backing and long-term revenue stream generated by the business, the majority of which is government backed.
The shares are trading on a high earnings multiple for good reason – the visibility of revenues. In the current year it is 18.2, falling to 17.2 in the year to December 2012.
First tipped at 263p on December 18 2008, they have been as high as 326p. The view remains the same, buy for the yield.
Lonrho
12p -½
Questor says BUY
THE Pan-African conglomerate posted a good set of interim results – underlining the long-term investment case for the business.
Lonrho is a conglomerate operating in five divisions – transportation, agriculture, infrastructure, hotels and support services.
In the first half, revenues rose 35pc to £81.4m, with like-for-like sales up 28.7pc. Pre-tax profits soared by 190pc to £5.8m, but a significant amount of the uplift was down to biological assets.
The company's agribusiness is now a substantial amount of its business, the valuation of biological assets involved (plants and trees) was raised by £12m in the first half of this year compared with £3m in the corresponding period last year. This is the group's second set of interim numbers, as it is moving to a December year end.
The group has launched a review of its airline operations – Fly540 – which prompted some speculation that the business was about to be sold. This appears off the mark. It is more likely that this is about finding the next steps in growing what is a pretty exciting business. It may involve a financial partner, but not a wholesale exit from the business.
Lonrho is well placed to benefit from the long-term African growth story – and these figures are one step along the way. Take the opportunity as a supplier to Walmart – after proving the relationship through contract to supply 540 stores, Lonrho is now supplying a further 740. The growth opportunity is obvious – Walmart has a total of 4,000 in the US alone.
Profitability is expected to rise sharply in the next few years, with the current year's earning multiple of 39.2 falling to 9.8 in 2012 and just 6.2 in 2013. The group is not yet paying a dividend.
Tipped at 13p on October 6 this year the shares are down 8pc, but remain a speculative buy.