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Investors Chronicle: Land Securities, Brewin Dolphin, Vodafone

Hold: Land Securities Group (LAND)

The investment case will rest on whether temporary effects give way to long-term structural weakness, writes Emma Powell.

Landsec is braced for further blows to its rental income in the wake of the government-enforced lockdown and social distancing, warning that third-quarter collections in June could be worse than the shortfall suffered in the prior quarter. After receiving only 63 per cent of rent due at the end of March, the commercial landlord is not hopeful about recouping those arrears, taking a £23m provision that is equivalent to almost three-quarters of the outstanding amount.

The Covid-19 fallout has exacerbated pressure on a structurally challenged retail estate, which suffered a decline in value of more than a fifth last year and caused the group’s pre-tax losses to soar. Even after excluding the second-quarter rent provision, like-for-like rental income from retail assets was down by 4 per cent. 

There is likely to be further pressure on estimated rental values in the retail sector, said chief financial officer Martin Greenslade. “I think the lease relationship might change, it might have more of a turnover component to it,” he added. Around a quarter of leases are currently linked to a tenant’s turnover. 

The group is on site at four schemes totalling 1m square feet, but has only committed capital expenditure to 21 Moorfields, EC2, which is fully let. It has the option to stop development activity at ground level on the remaining three, which has left the group with £340m of committed unspent funds on sites currently in the development programme. 

Analysts at Peel Hunt forecast adjusted net asset value of 1,050p at the March 2021 financial year-end.

Hold: Brewin Dolphin Holdings (BRW)

Although headline client figures had been well-trailed ahead of half-year results, analyst reaction was generally effusive in its praise of Brewin’s flexible and resilient business model, writes Alex Newman.

In the six months to March, client funds managed by Brewin Dolphin slipped 8 per cent to £41.4bn. Excluding acquired client mandates and total funds declined by 14 per cent.

With most of that drop coming from asset price falls at the end of the period, the impact on the investment manager’s bottom line was negligible. Strip out adjusted items including acquisition costs and goodwill amortisations, and basic earnings per share only edged down 2.9 per cent.

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The flipside of this timing is a smaller asset pile from which to generate fees in the second half. This, together with the “high level of uncertainty” the board sees in markets, helps explain why Brewin thinks the final dividend may be “towards the lower end of the target payout ratio” of 60 to 80 per cent of adjusted diluted earnings per share.

Still, investors can point to three sources of encouragement. First, the switch to remote working has been seamless despite a spike in client engagement and demand for advice. Second, a combination of experience and wealth goals mean clients have tended to boost rather than cash-in their funds throughout the recent volatility. Third, up to £8m of cost savings have been identified for this financial year.

Liberum forecasts adjusted earnings per share of 17.1p for the 12 months to September, and 17p in full-year 2021.

Hold: Vodafone (VOD)

Shares in Vodafone were buoyed by the news that the telecoms group would stick to the payment of its final dividend, providing some hope for income investors as a number of FTSE 100 companies, including peer BT, have suspended payouts, writes Lauren Almeida.

Vodafone’s decision follows a dividend cut last year from 15 cents to 9 cents a share, which it has maintained at the same level. Yet the group should not have to dig too deep into its pockets this year: free cash flow grew by more than a tenth to €4.9bn (£4.3bn) in 2020. Pre-tax return on capital employed rose from 5.3 per cent to 6.1 per cent, which it attributed to growth in adjusted cash profits, digital transformation and improving asset utilisation.

However, net debt ballooned by more than half to €42.2bn, or 2.8 times adjusted cash profits, driven in part by the purchase of Liberty Global assets, which were consolidated from August 2019. Management added that the monetisation of European TowerCo was on track for early 2021, which should help to reduce leverage. The group is also prioritising its digital transformation plan, which helped to generate €400m of net operating cost savings in 2020. It has therefore accelerated its ambitions for digital, with a new three-year plan that aims to deliver over €1bn net cost savings.

The group has inevitably been affected by coronavirus, with roaming data usage down as much as three-quarters due to reduced international travel. While business in Germany has proved resilient, which accounts for a third of the group’s adjusted cash profits, it has seen a more significant impact on performance in Spain. The corporate division is experiencing some payment delays for small- and medium-sized enterprises, as well as slower decisions on projects for large businesses.

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Analysts at Goldman Sachs forecast revenues of €44.9bn and earnings per share of 4 cents in 2021, compared with €43.7 and 3 cents in 2019.

Chris Dillow: A hope of inflation

Should we fear that inflation will rise as demand recovers when the lockdown is lifted? As equity investors, the answer is clear: no. We should not fear inflation, but rather hope for at least a little of it.

Since 2008 there has been a clear correlation between share prices and inflation expectations, as measured by the gap between conventional and index-linked gilt yields (also known as break-even inflation). Falls in inflation expectations in 2008, 2012, 2015 and recently were all accompanied by falls in equities, while rising inflation expectations in 2009, 2013 and 2016 all saw shares rise.

In the UK and US, this represents a total U-turn from previous years. For a long time, inflation was terrible for equities. The surge in it in the 1970s was accompanied by a slump in share prices, while the long decline in inflation in the 1980s saw a great bull market. And even in the late 1990s, falling inflation expectations were accompanied by rising equity prices.

So what has changed? To see it, think back to the 1980s and 1990s. Higher inflation then was bad for shares on two counts. First, it led to fears that the Fed and Bank of England would raise interest rates. That hurt shares not just by raising the attractiveness of cash but also by fuelling fears of weaker growth in earnings. Second, inflation created uncertainty: how high would it go? Would central bankers’ efforts to combat it plunge economies into recession?

When interest rates are near zero, however — as they have been since 2009 — this logic is flipped on its head. Now deflation is the big fear. It would raise real interest rates (as inflation turns negative but rates stay around zero) and create uncertainty, in part because aggregate deflation in the west is so unfamiliar.

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The problem here is not that central banks can do little to support economic activity when rates are zero and the aggregate price level is falling. They can do plenty: not just quantitative easing but subsidies to banks to lend (such as the European Central Bank’s targeted long-term refinancing operations), direct financing of government borrowing, or simply depositing money into everybody’s bank account.

Instead, the danger is corporate debt. Companies that see their prices fall while interest rates on their debt stay above zero will find it harder to service their debts. That threatens a wave of bankruptcies and hence losses for banks, causing them to withdraw credit from even healthy companies. In this way, price deflation can cause debt deflation. And as we’ve learned from the aftermath of 2008, financial crises can depress economic growth even in the long run, to the detriment of corporate earnings.

Of course, this is only a risk. But it’s one that increases as inflation falls. And it’s perfectly reasonable for investors to worry about the small but rising chance of something nasty.

But will the risk materialise? For now, investors believe it is only a small danger: although break-even inflation has fallen, it is only around a four-year low. This is because while there is a danger of a weak recovery in demand which might depress inflation, other factors might keep it up. The fear of catching or spreading the virus might keep people at home even when the lockdown is legally lifted; the lockdown will create a wave of business failures that will reduce capacity and so raise inflation; and the crisis is creating a mismatch between the pattern of supply and demand, which could itself raise inflation.

We cannot, however, be at all certain about any of this. We are in uncharted waters. What is plausible, though, is that the risk of deflation — small as it is — is weighing down share prices and so a rise in inflation would be a good thing to the extent that it reduces this risk. Some of the ideas we picked up in the 1970s and 1980s are wrong.

Chris Dillow is an economics commentator for Investors Chronicle


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