Invest-ability bulletin 17/11/21: Pain And Gain

A sell-off in one Aim darling is a reminder that investing can at times be painful

Apologies for the lack of contact this week. I have been flat on my back for much of it – kitchen tables really are a poor substitute for proper desks, which is something I don’t think the health and safety mob have thought enough about in their enthusiasm for home working throughout the pandemic, and why I don’t think offices are quite as dead as has frequently been suggested. The last thing the NHS needs after a viral epidemic is an epidemic of bad backs.

I knew that was the case even before my latest lumbar issues, which is why I wrote a few weeks ago that the market may have perhaps been overly harsh on those companies in the office business, particularly Land Securities. It had some numbers this week which support my gut – or should I say back – feel; its shares saw a nice jump after it reported a return to profit and a higher dividend, an increase in activity in the London office market, and evidence that it’s in the right place to benefit from the “flight to prime” in physical retail. True, the growth in its like-for-like NAV was hardly stellar, but slow growth is better than negative growth which is why the massive share price discount to book value – roughly a quarter – still looks too deep to me. The company is also belatedly sharpening up its net zero activities, which along with its urban regeneration push has the potential to deliver lots of development upside.

Signs of a recovery in physical retail are also why I’m less convinced whether there’s as much value left in the landlords of industrial property, now rebranded as the ‘shed’ market to capitalise on the interest in e-commerce growth. I wrote about why I think Aim’s distribution Reits, Warehouse Reit and Urban Logistics, may see more sedate growth ahead after a boom in FY2021. But it’s the massive premium to NAV at Tritax Big Box on the main market that keeps niggling – 25% at the last count (interestingly, a near-perfect inverse to Land Securities). Admittedly it’s got a lot of development land in its portfolio which will add a significant chunk to NAV once it’s built – it reckons that it can turn the £300m it’s just raised, along with extra leverage, into a 7% NAV uplift. But the share price premium demands perfect execution, and also that the future looks exactly like it does right now. After the last two years, I’m not even sure we can safely predict what tomorrow will look like anymore.  

Of course, I’m not for a minute suggesting that everyone is going to be abandoning  their Amazon baskets in favour of a day out at Bluewater (although Amazon announcing plans to abandon Visa for UK credit card payments from January is a sign of how quickly a narrative can shift). But I don’t think we’re likely to see a repeat of the furious activity seen in the logistics market over the past 18 months either.

Amazon perhaps offers a case in point here, too – it’s planning to open 260 cashier-less grocery stores in the UK over the next couple of years, which as well as being a source of more sleepless nights for supermarket investors also highlights that there’s room in the world for both digital and physical (maybe even troubled convenience retailer McColl’s as Phil discussed here). We should perhaps consider their interplay in a more nuanced, less black and white way. As Phil and I discussed on Friday’s Quality Shares podcast, some decent figures from Marks and Spencer’s food business and Primark owner ABF in the last week show that the right in-store experience can keep the punters coming through the doors, while click and collect is an increasingly popular format, allowing retailers to benefit from e-commerce at the same time as sweating their retail locations).

While I have been dealing with physical pain this week, I know lots of investors have been experiencing some financial pain, not least of those holding Avon Protection or those hit by a sell off at Aim-traded electronics group Volex. Its headline numbers were actually quite good, with sales up 45% and underlying profits up by nearly 22% thanks to strong demand for cables and plugs for home electronics and electric vehicles. Quality metrics like ROCE look good, too, but the shares have since slipped 10%, leaving many investors scratching their heads – a puzzle Phil has gone some way to solving in this article.

Looking across Aim, as Phil and I have been doing for the last week or so, and you can find lots of shares that, like Volex and the last mile distribution landlords, are facing more scrutiny over their prospects after a very strong run. In some respects, it’s good to see a bit more circumspection returning to some areas of the market – we are seeing further evidence every day that the economic backdrop is very unusual indeed, not least that inflation will remain a sticky problem for investors to contend with for some time. And as Phil and I have argued, it is those shares that are most highly rated – and which thus offer a lower earnings yield – that could be most affected, a particularly pressing question for Smithson, one of two investment trusts that Phil has written about this week to kick off our funds coverage alongside Nick Train’s Finsbury Growth and Income.

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