British commercial property developer and landlord British Land (OTCPK:BTLCY) has had a rough few years. I assume that the ongoing problems in the British economy will mean that the road ahead will also be rocky. However, a price decline means that the company now looks more reasonably valued than before, although I will not buy as I think the UK stock market is offering other, far more interesting opportunities at the moment.
My last article on the company was in June 2021 (British Country: Still Overvalued) where I was pessimistic as it faced ongoing challenges and felt overpriced. Since then, shares have fallen 33%. I mentioned in that article that the company had cut its dividend, but the share price decline means it now yields 6.3%.
The long-term demand environment looks good to me
The UK’s new Prime Minister and her Chancellor have already made a royal mess in the City, I think, and put many UK stocks in an even worse position than they already were. As has been the case in recent years, there is no shortage of negative headlines surrounding the UK’s economic travel direction
Take a walk around London (and to some extent smaller cities) and reality doesn’t live up to the headlines in my opinion. Things are brisk, companies are busy making up for lost time and there’s little sense in us going to hell in a hand basket, so we might as well give up hope. I think the long-term demand for commercial property in the UK remains positive. Despite all the challenges the sector has faced in recent years, I remain optimistic about the long-term prospects for the sector in which British Land holds a strong position.
The company had already recovered significantly from the pandemic last year. That’s pretty much what I would expect from a company like British Land. Although the pandemic delayed some rent payments, sent some tenants to the wall, and imposed additional costs on the landlord, I think the company’s long-term trajectory looks broadly the same: The pandemic hasn’t changed the fundamentals of the business.
The dividend yield is over 6%
British Land’s dividend last year was just 71% of its 2019 dividend. In my 2020 article British Land: Don’t Take The Dividend For Grants, I explained that the company’s revised dividend policy means the company’s payout is less consistent than before and can also lead to cut injuries. We’ve certainly seen it be less consistent. Last year’s dividend wasn’t a cut per se, as it was significantly higher than last year’s payout. But levels remain well below pre-Covid-19 pandemic levels and I still believe the dividend policy could mean cuts going forward depending on how the business plays out.
Right now, however, the dividend yield is 6.3%, which I find attractive for a blue-chip real estate company of this caliber.
The rating looks reasonable
Having lost a third since my bearish note indicating they were overvalued, are British Land shares good value now? After all, the shares are trading at a 52% discount to the EPRA Net Tangible Assets (NTA) value per share of £7.27. That makes them look cheap, but in reality, that number isn’t very helpful as the company won’t be realizing these assets anytime soon, except for investors with a very long time frame.
Using the most recent underlying full-year earnings per share, the company trades at a P/E ratio of nearly thirteen. Using the IFRS number, the ratio is dramatically different at just over 3, but I don’t think that’s a useful indication of actual returns that an investor can use to calculate value. Free cash flow was £75m last year before paying dividends. After accounting for dividends, the company recorded a net cash outflow of £80m for the year. The market cap stands at £3.3 billion.
I see limited potential from here. The company is facing a number of challenges, such as a potential slowdown in office demand and a slowing UK property market, which could negatively impact future rental prices.
I think it can handle those challenges, but they exist. Here, too, the investment case is mixed in my view. British Land is considered fairly stable thanks to its portfolio of quality properties and long-term commercial lease business model. However, recent years have shown that this is no guarantee of consistent results. Whilst I like the current dividend yield, the lack of likely consistency in the dividend contrasts with other sectors in the UK equity market currently offering similar returns which I think are generally more likely to hold or grow their dividends annually (Tobacco and financial services). two examples).
I expect further turmoil in the UK property market and economy to dampen sentiment towards British Land. I don’t see the stocks as bargains.
However, given the strength of the business and a yield of over 6%, I consider the current share price to be fair value and am adjusting my rating accordingly back to hold.