Real estate investment trust Hammerson PLC (LON:HMSO) is dividing opinions in the broking community, with Credit Suisse downgrading the stock and Goldman Sachs defending it.
Neither is particularly optimistic about the UK commercial property market.
READ: Hammerson's £3.4bn takeover bid for Intu could raise competition concerns, says analyst
Goldman Sachs is forecasting some significant declines in UK commercial property markets, albeit at a slower rate, and it sees this trend as creating an opportunity for well-placed landlords to outperform.
Among those it expects to benefit are the aforementioned Hammerson and Land Securities (LON:LAND).
Hammerson was put on Goldman Sachs ‘conviction buy’ list, while Land Securities has been upgraded to ‘neutral’ from ‘sell’.
Ahead of Hammerson’s merger with Intu Properties PLC (LON:INTU), Goldman Sachs said: “While Hammerson’s shares have continued to underperform, evidence grows of the operational performance and potential merger synergies”.
It believes both earnings upgrades and a better share price multiple are share price drivers and finds some of the negative sentiment surprising given Hammerson’s five-year track record of growing earnings per share by almost 50%.
Talking of negative sentiment, Credit Suisse has done a detailed analysis of the UK shopping centres owned by Hammerson and Intu and has downgraded both stocks.
Hammerson has been downgraded from ‘outperform’ to ‘neutral, with the target price tumbling to 460p from 605p, while Intu sees its price target slashed to 205p from 270p and the rating move from ‘outperform’ to ‘underperform’.
“Cyclical headwinds are building in UK retail and coinciding with an ongoing structural shift away from physical shopping to online, which is weighing on Hammerson's share price and could weaken the rationale for acquiring Intu Properties on current terms,” Credit Suisse said.
Those terms involved Intu shareholders receiving 0.475p Hammerson shares for every Intu share currently held.
Credit Suisse suspects Intu shareholders are getting the better end of the deal.
“The proposed exchange at H1 17 triple net asset value (NNNAV) appears attractive for Intu shareholders given it brings exposure to Hammerson's higher-growth markets, a fresh management approach and a share in £25m p.a. of Hammerson-estimated synergies. That said, deterioration in the UK retail environment since the deal was announced in December poses a risk to the transaction being completed, which we factor into our target price and rating,” the Swiss bank explained.
Intu’s shares rose after the agreed offer was announced but those gains have largely evaporated due, Credit Suisse (CS) believes, to the deterioration in the UK retail market, as evidenced by the number of big names cutting back on outlets or going into administration.
“We believe Intu's portfolio would not command the yields used in its recent appraisal if the assets were to be disposed of in the open market and the 5.0% average yield we use in our own assessment to value Intu’s portfolio results in values 13% lower than last appraised by the company,” CS said.
Shares in Hammerson were down 5.6% at 430.95p while Intu was down 3.1% at 205.8p.