Although Workspace is a real estate investment trust, it is better viewed as a play on the more established end of the London small and medium-sized enterprise market.
In November 2022 this column said at 424p the shares were priced for catastrophe, and indeed they have yet to see a proper recovery from the pandemic. The chart is still largely in an L-shape from early 2020, rather than the more common U or J, thanks to the flatlined economy, working from home and the cost of living crisis. But as those features fade, the shares should respond.
Founded in the East End in 1987, from its present head office in Kennington, south London, the company has built a network of 4.4 million sq ft of flexible office and light industrial space across 74 locations, with another one million sq ft in the pipeline.
They are mainly in the Transport for London zones 2 and 3, including some of the trendier but not too expensive parts of the capital: Westbourne Studios, Clerkenwell Workshops, The Light Bulb in Wandsworth, Evergreen Studios in Richmond, Chiswick’s The Light Box and the Centro Buildings in Mandela Street, Kentish Town. Very hip, very sustainable.
It is a highly cyclical business, as the latest downturn has shown. Lacking resilience, experience or banks with infinite patience, swathes of small tenants can disappear within months. And, as Workspace owns freeholds rather than more financially efficient leaseholds, it takes such hits full on the chin. However, when the good times roll it benefits without much outlay and profits shoot straight through to the bottom line.
The company argues that freeholds enhance asset value and give it more scope to reshape buildings to meet customer demands. If an occupant wants to expand from 800 sq ft to 1,200 sq ft, Workspace can make that happen without resorting to a landlord. Senior management also points out that it caters for the upper and therefore more stable end of the SME breed, typically with about ten employees and a few years’ trading. That automatically eliminates the bulk of the less resilient.
As Workspace has only 4,000 tenants out of the 130,000 London SMEs, it has plenty of room to grow, subject to finding properties that meet its specific requirements in terms of location, floor footprint and ease of reshaping. For the present, at least, the management are ruling out Birmingham, Manchester or Glasgow, arguing it would take too long to get to know them and they have plenty to get on with. That is an opportunity for local copycats to borrow a proven format.
In July the firm announced the rent roll for the three months to the end of June was up 1.2 per cent on a like-for-like basis at £111.8 million. Although the occupancy rate was an unchanged 88.2 per cent, rent per square foot by a like-for-like 1.2 per cent rose to £46.28.
Graham Clemett, the chief executive, said: “It has been a good start to the financial year, reflecting the resilience of our diverse customer base and the appeal of our distinctive, flexible offer.”
That followed rental income 8.2 per cent higher at £126 million for the year to March, giving a healthy £66 million trading profit, but a pre-tax loss widened from £37.5 million to £192.8 million due to a £255.3 million writedown on property values and another £2.3 million loss on property sales. That is hoped to mark the low point in post-pandemic revaluations.
Adjusted underlying earnings per share were 2.4p stronger at 34.1p. The annual dividend rose from 25.8p to 28p. That puts the shares on 17.6 times earnings, with a 4.6 per cent yield. If the writedowns really are at an end, the 48 per cent gross profit margin goes to the net level virtually unscathed.
An intriguing bonus for investors is the presence on the share register of Nicholas Roditi, an associate of the Hungarian-American billionaire investor George Soros, with a 28.1 per cent stake. At 590p, the shares have left catastrophe behind, but they are still a long way from the £13 of February 2020. That is a measure of the potential for recovery.Advice Buy Why A sound business with expansion prospects
While it is often sound stock market advice to buy when others sell, there is also the warning not to catch the equivalent of a falling knife. It is starting to look as if Victrex shares are in the latter category. They have been on an almost uninterrupted slide for three years, more than halving the price from a peak £26.11 to their current £10.30.
The company makes polymers which can be fashioned into a wide range of materials, from polystyrene to roofing to foam rubber. Victrex products are found in cars, aircraft, mobile phones and industrial machinery. Its prize specimen is polyether ether ketone (Peek), a colourless organic thermoplastic polymer widely used to make rings and gadgets in engineering.
Peek’s versatility and lower cost has previously powered sales, but they have foundered on what looks worryingly like a structural transformation in the medical device market.
In the growth years, the firm’s products featured in many drug delivery systems and ever-inventive surgical procedures that have been catering for the growing older population. But those markets are being hit by artificial intelligence, cloud computing and 3D rendering or replicating. As plastics are replaced by digital alternatives, Victrex customers are destocking, cutting orders.
Last year this column said: “The markets Victrex sells in are cyclical, competition is rife and a strategy to move into higher-margin, value-added parts has been slow and costly.” Analysts at Peel Hunt extend their caution into 2025. They note improvements in several of the firm’s end-markets, but have nevertheless trimmed their profit forecasts by 10 per cent, taking likely earnings per share to 57.9p.
On that basis the shares are on a still-demanding 18.65 forward price to earnings ratio. The saving grace is a 5.3 per cent yield, assuming that can be maintained, but it is telling that the stock market has let the share price drop low enough to produce such a generous income. There is much work to do before the outlook becomes clear enough for investors to make a rational decision.Advice AvoidWhy Any purchase now would be a shot in the dark