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Strong foundations at British Land


It has been a volatile week for equities as the Greek bailout drama rumbles on. At the end of last week Athens called for a referendum on the terms of its creditors’ final bailout offer, triggering a sell-off in stocks, amid concerns that the country was edging closer to exiting the Eurozone.

After failing to meet Tuesday’s deadline to make a €1.6 billion repayment to the International Monetary Fund, Alexis Tsipras apparently conceded to ‘almost all’ of the demands made by creditors in their final bailout offer. Yet later that day, the Greek Prime Minister insisted the referendum planned for this Sunday would still go ahead and urged for the electorate to vote ‘no’.

The latest polls suggest the majority will vote to reject the creditors’ latest offer, heightening the risks of a Greek exit from the Eurozone. Despite these concerns, global stocks rallied and the Euro remained above its March lows, implying either a deal would still be done, or perhaps investors are adjusting their mindsets to the Eurozone being a stronger region without Greece.

Away from the dominant Greek headlines, strong global macro-economic data supported improved growth, with US consumer confidence increasingly solidly throughout June. The Conference Board said its index of consumer attitudes rose to a reading of 101.4 this month from 94.6 in May, as households grew more bullish about the property and job markets.
US non-farm payrolls increased by 223,000 in June, coming in slightly below economists´ forecasts for a rise of 233,000, although the unemployment rate dropped from 5.5% to 5.3%.  Meanwhile, a forward looking indicator of US home sales rose to its highest level in more than nine years in May, indicating growth was gaining momentum after gross domestic product shrank by 0.2% in the first quarter.

In the Eurozone, the final reading of the manufacturing purchasing managers’ index confirmed factory activity had hit a 14-month high in June, the latest sign that a recovery in the region is finally gaining traction. The flash Markit Composite PMI rose to 54.1 in June from 53.6 in May, implying GDP growth of at least 1.5% this year, compared to 0.9% in 2014.
On the domestic front, British consumer morale surged to its highest in over 15 years this month, adding to signs that growth is improving after a weak start to the year. Market research company Gfk said British consumers’ mood was the most buoyant since January 2000, after its month sentiment index jumped to +7 in June from +1 in May, as a rise in wage growth and the lowest inflation in 50 years boosted disposable income.

Technical analysis of the FTSE 100 illustrates the index appears to be improving after consolidating around 6535. The oscillators are starting to rise out of acutely oversold territory, indicating improved momentum, while the bullish divergence evident from the RSI suggests a bounce could be reasonably aggressive. Support is seen at 6535, while resistance could be felt at 6735 and 6875.

In conclusion, markets remain hostage to the headlines regarding the next steps in the Greek drama, although other headwinds facing the markets appear to be easing and global growth continues to gain traction. Equities appear to be pricing in the opinion that the outcome of Greece may not make a huge difference to the markets, while an increase in global mergers and acquisitions to its highest since 2007, supports the case that equities remain a favourable asset class.

Property related stocks have remained well supported, with full-year results from UK real estate firm British Land (LON:BLND) benefitting from a buoyant property market. The real estate investment trust (REIT), which has offices and residential properties in London and retail and leisure properties around the UK, reported a rise in full-year profit and an increase in its portfolio value.

The property developer reported a pretax profit of £1.79 billion for the year ending 31st March, up from £1.11 billion a year earlier, while adjusted net asset value per share rose 20.5% to 829p. The company lifted its full year dividend to 27.68p from 27p, adding that it will pay a first quarter dividend of 7.09p, a 2.5% increase from last year.

British Land has continued to reduce its exposure to the superstore sector, with contracted net income now representing just 7% of the total. Meanwhile strong demand for office and retail space boosted net rental income by 20% to £375 million, with occupancy rates climbing from 96.1% to 98.3%. Retail lettings and renewals were secured 8.7% ahead of estimated rental value (ERV), while office space achieved rates 10.8% above ERV.

The company has a strong balance sheet with a modest loan-to-value rate of 35% and a reduced debt cost of 3.8%. On prospective earnings of 24.6x, British Land trades at a discount to the sector on 27.3x and at a concession to forecast book value.

The outlook is robust, with rising employment in London combined with real wage growth, showing it should support demand for London offices and regional retail respectively. Chief executive, Chris Grigg, said: “Our results give us confidence we are well positioned for changing trends in the real estate sector. We have a modern portfolio focussed on the right locations, a strong balance sheet with a low cost of debt and an exciting development program."

The chart of British Land illustrates the recent retracement with the wider market, dragging the shares back to multi-month support at 800p, whilst, the oscillators are starting to improve out of acutely oversold territory, indicating improved momentum.

British Land offers an opportunity to take advantage of the strong London property market, while robust results, a progressive dividend policy and an enticing technical outlook, suggest this could be a good entry level. At the time of writing the share price is 801p and with a tight stop-loss below support at 777p, it offers an attractive risk / reward bias. Targets are seen at 833.1p, 865p and 926.4p.

This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in British Land, but client accounts may. The material in this report has come from SI Capital’s internal data sources and British Land’s corporate website.

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