The one UK stock to buy now

It’s no secret that the JSE’s tally of UK-focused property stocks hasn’t really delivered returns worth writing home about in recent years.

But if you’re looking to diversify from domestic stocks, many of which may appear expensive after last year’s SA Inc rally, mall owner Hammerson is the one UK-based counter that should be on your watch list.

In fact, the FM believes a number of fund managers have already been building stakes in Hammerson in recent weeks, among them Coronation.  

Hammerson was sold down aggressively after the pandemic on the back of widespread tenant failures, valuation writedowns, a complicated capital structure and an unsustainably high cost base. 

More recently, fellow JSE-listed retail-focused property stocks and former major shareholders, Lighthouse Properties and Resilient Reit, are among those that headed for the exits.

But Hammerson, which is listed on the London Stock Exchange and made its debut on the JSE in September 2016 with a market cap of a colossal R100bn, had already lost favour before Covid, no doubt due to Brexit jitters and the rising threat of e-commerce.

The company’s market cap has since shrunk to R32bn. However, Hammerson now appears ripe for a rerating after last year’s keenly awaited sale of its stake in Value Retail, a company that owns a portfolio of nine luxury retail villages in major European capitals.

The £1.5bn deal has left Hammerson with a more streamlined portfolio of 10 prime shopping and leisure destinations and a significantly stronger balance sheet.

The company’s £2.7bn portfolio is spread across the UK, Ireland and France. Flagship properties include Brent Cross in London; Bullring & Grand Central in Birmingham; Les 3 Fontaines in Cergy, northwest of Paris; Cabot Circus in Bristol; and Dundrum Town Centre in Dublin, of which the quality can be compared to Sandton City and the V&A Waterfront.

The Value Retail sale came after an intensive three-year restructure under Hammerson CEO Rita-Rose Gagné, who joined the company in 2021.

Gagné’s efforts to place the company back on the growth path is evident from its latest results, which reflect a decent 5% increase in dividends for the six months to June.   

This was the first time since 2018 that rental reversions in all Hammerson’s retail destinations were back in positive territory. In addition, new tenant sales were a hefty 20% ahead of those of previous occupiers. 

Administration expenses were reduced by 16% year on year, bringing total cost reductions since 2020 to more than 30%. 

Importantly, Gagné has been putting the proceeds of the Value Retail sale to good use in recent months. A large portion of debt has been repaid, taking the loan-to-value ratio from 39% to 25.5%. Management embarked on a one-for-10 share consolidation and a £140m share buyback programme. 

In November, Hammerson acquired the 50% stake it didn’t yet own in Westquay shopping centre in Southampton for £135m.

We think Hammerson is now in the best shape it has been in for many years, if not in the best shape ever

—  Nicolas Lyle

Analysts expect further benefits to flow to the bottom line this year, including a significant uplift in earnings and dividends due to lower debt funding costs and the completion of the share buyback programme.

Shareholders can also look forward to an increase in the dividend payout ratio to 80%-85% of adjusted earnings, up from a historic 60%-70%.

Meanwhile, there have been some big swings in Hammerson’s share price amid rumours of a looming buyout. The stock was down nearly 20% in the first week of January and up again 8% in the second week. At this week’s share price of about R65, Hammerson trades nearly 70% below its early 2020 levels.

Nicolas Lyle, property analyst and portfolio manager at Stanlib, says it’s no surprise that Hammerson has become a takeover target given its successful transformation and the large discount to NAV (about 30%) at which the stock trades.

Lyle believes fellow London-listed Land Securities, the second-largest UK real estate investment trust (Reit) after Segro plc by market cap, is the most likely suitor, as the company has already increased its exposure to the retail sector.

“We think Hammerson is now in the best shape it has been in for many years, if not in the best shape ever,” says Lyle. Yet that’s not reflected in the share price.

Lyle says the aggressive sell-down in recent years may have made many investors lose touch with what’s happening at Hammerson. “The value-unlock opportunity is perhaps not fully understood by the market,” he adds.

Still, he expects a significant rerating in the share price in the coming months. Apart from the possibility of a takeover, several other factors, most notably the likelihood of double-digit earnings growth in 2025 and 2026, will bolster Hammerson’s share price, he says.

That comes on the back of reduced debt costs and a huge windfall from the 8%-10% reduction of shares in issue that will result from management’s share buyback scheme, which kicked off in October and which Lyle says is expected to be completed by end-March.

He adds that the Value Retail sale has given Hammerson the firepower to do accretive deals and buy out more of its joint venture partners, reinvest in existing assets and develop its vacant land holdings.

Lyle notes that the UK retail sector — which was slow to rebound from the surge in e-commerce, pandemic-induced headwinds and higher-for-longer interest rates — finally appears to have entered a recovery cycle.

He believes existing mall owners will be major beneficiaries of improved market conditions, as there’s been no growth in new supply in recent years. 

“It’s a good time to buy Hammerson shares. The stock is cheap and we see limited downside from here,” he says. 

Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, agrees that Hammerson offers upside potential given its transformation in the past six months.

He notes that the company’s shares have already started to rerate relative to other UK-based Reits, which implies an “improved growth outlook and significantly lower balance sheet risk”.

Further upside will be based on management’s ability to deploy the capital freed by the Value Retail deal in the best way, he says, but there is downside risk, as sticky inflation and high government spending in the UK could continue to weigh on investor sentiment.

Tilly adds: “US Treasury yields have risen sharply as markets digest the administration of US President Donald Trump, who plans to impose tariffs and implement tax cuts that have raised fears of further inflation and higher deficits.”