Edison | Feb 11, 2013 05:19AM ET
NewRiver Retail (NRR.L) represents a way to capitalise upon a weak UK retail backdrop. It acquires high yielding (c 9-10% net initial yields) town centre retail assets in better performing UK locations, with a defensive tenant weighting in less discretionary areas of consumer spending such as food, value and health & beauty. Despite media coverage of the challenges facing UK retail, none of the recent high-profile retailer failures (Game, Clintons, HMV or Jessops) operated in any the group’s 23 retail centres. Dividends are covered by earnings from affordable rents (and an assumed £0.8m cash disposal gain in FY13) and growth predicated only on asset management initiatives, with no increase in underlying market rental values. NRR confirms a pipeline of suitable acquisitions and its recent JV with PIMCO reveals a commitment to take advantage of this and continued demand for new stores from food and value retailers to support plans for refurbishment and pre-let development over the next few years. Interim results were stable compared to the second half of FY12, with modest acquisitions in the period.
Valuation & sensitivities: Covered 8.0% prospective yield
We have reduced our dividend forecasts to 16p for both FY13 and FY14 (previously 16.5p and 17.5p), a covered 8% prospective yield, supported in FY14 by a full year contribution from the new joint venture. We have assumed a £0.8m profit from asset sales in FY13. The high yield and discount to NAV reflects concern over the UK retail focus. However cash flows remain resilient, and the new JV provides a platform for further acquisition growth, subject to access to capital, assets at high net initial yields and low-cost fixed-rate debt. Our 240p/share FY13 NAV forecast assumes no benefit from asset management in H2, and includes c 2.5% dilution from the share issue to fund the JV investment. We continue to expect NRR.L to create additional value from £400m of assets under management.
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