Buy: St Modwen Properties (SMP)

While shares still trade at a discount to forecast book value, there is more value on the balance sheet waiting to be unlocked, writes Jonas Crosland.

“While the economy is growing, we can always do well,” says Bill Oliver, chief executive of St Modwen Properties.

There was ample evidence to support his claim in last year’s trading performance, which saw adjusted book value jump 16 per cent to 344p. In fact, the property developer scored well across all its commercial and residential operations, and continues to work towards crystallising the gains within its development portfolio.

Notable achievements included securing planning consent for the redevelopment of the New Covent Garden site in Nine Elms in London, paving the way for 3,000 new homes, 135,000 sq ft of office space and 100,000 sq ft of shops and leisure facilities.

The other major project is the £1bn regeneration of the 468-acre former Longbridge site in Birmingham. This includes the construction of a 150,000 sq ft Marks and Spencer store, secured on a 35-year lease, which is expected to be completed in time for Christmas. The group is also well on the way to completing the £450m Bay Campus development at Swansea University.

On the residential side, the joint venture with Persimmon delivered 562 new homes, and the group’s own St Modwen Homes unit a further 258 units, lifting divisional profit by 167 per cent to £24m.

The company, which sits on a land bank of about 6,000 acres, also generates a useful revenue stream from its rental portfolio, which is more than enough to cover administrative expenses.

Sell: BP (BP.)

BP’s shares are cheap compared with peers, but the full impact of sanctions on Rosneft may not have played out yet, writes Mark Robinson.

The market reacted positively to a fourth-quarter update from BP, despite news of a hefty writedown and continuing uncertainty over the group’s Macondo liabilities.

The embattled oil major revealed underlying profits of $2.2bn (£1.5bn) for the quarter, which was well in advance of City estimates.

Shareholders will certainly have welcomed an unexpected contribution from BP’s near-20 per cent stake in Russian energy giant Rosneft. Although underlying profits for the final quarter came in at $470m, down from $1.1bn a year earlier, it had been widely feared that the state-controlled entity would be hit hard by Western sanctions implemented over Moscow’s role in the Ukraine crisis.

As a consequence of lower Brent crude prices, BP took a $3.6bn post-tax charge, mainly linked to impairments of upstream assets in the North Sea, Brazil and Angola. The group took a further hit of $477m in the final quarter from legal and remedial costs relating to the Gulf of Mexico oil spill. The total cost of the disaster now stands at $43.5bn.

Predictably, BP has taken an axe to its capital budget in anticipation of a weaker oil price in 2015. The group now estimates that organic capital expenditure is set to come in at $20bn this year, significantly lower than previous guidance of $24-26bn.

With net debt at manageable levels, we think the group’s dividend is adequately supported for the time being, even if receipts from divestments, which have hitherto supported cash flow, are likely to taper off this year.

Hold: Hargreaves Lansdown (HL.)

Freeing up the pension market should be good news, but the shares are very highly rated, leaving the investment case balanced, writes Jonas Crosland.

Hargreaves Lansdown maintained its formidable reputation for gathering private investor assets in the six months to December 31, increasing total funds under administration by 13 per cent to a record £49.1bn.

But regulatory changes have left the fund supermarket and retail stockbroker struggling to maintain its margins on those assets, so profits fell slightly — precipitating a 6 per cent correction in the shares on Wednesday, results day.

Active client numbers grew by 23,000 to 675,000 over the period. That’s about half last year’s number even if you exclude the 32,000 new clients that took part in the Royal Mail flotation in 2013.

Even so, the new business offset the impact of the lower charges introduced last March in the wake of the Retail Distribution Review, so that revenues (net of commissions) edged 1 per cent higher.

But profit growth lagged behind. That is partly because lower interest rates depressed interest income on client funds, following regulatory changes that restricted the use of term deposits for client money to just 30 days; short-period investments attract lower interest rates.

Yet the group could also benefit from regulation, notably pension changes that start in April. It is launching its own Hargreaves Lansdown Retirement Planner service in preparation for the changes which are set to give retirement savers more flexibility.

Analysts at Numis Securities are forecasting full-year pre-tax profit of £227m and earnings per share of 37.5p, up from £210m and 34.5p in 2013-14.

Stock screens: Three dividend growth plays

My inflation-beaters screen, set up when inflation was on the market’s mind in 2012, has virtues beyond finding stocks that do well in an above-target inflation environment, writes Algy Hall.

It focuses on finding high-quality stocks by looking for companies that boast strong records for dividend growth and have underlying fundamentals that suggest more growth. High-quality stocks, even highly priced ones, often outperform whether inflation is an issue or not.

The screen focuses on the FTSE 350. The criteria are:

● A rising dividend in each of the past 10 years;

● Ten-year and five-year compound average dividend growth of 5 per cent or more and growth in the past year of 5 per cent or more;

● Dividend cover of two times or more;

● Net debt of less than 2.5 times cash profits;

● A return on equity of 15 per cent or more;

● A dividend yield of 2 per cent or more;

● Forecast earnings growth both this year and next.

The screen’s chief concern is quality and it puts minimal emphasis on valuation. The 2 per cent dividend yield requirement — the only valuation criteria — ensures the dividend growth that the screen looks for can be considered meaningful.

Despite the screen’s free-and-easy approach to the question of value, only three FTSE 350 stocks made it through all the criteria this year.

Engineering consultancy WS Atkins, looked well-positioned when it reported half-year results in November.

Having restructured its North American operation and sold non-core businesses, the group is more focused and there are signs of good growth potential in its markets.

The business is cyclical by nature though and has some exposure to oil-price sensitive industries. While the shares are not exactly cheap, the company has good margin-improvement potential. With a useful cash pile, it is also likely to continue to pursue a strategy of augmenting organic growth with acquisitions.

While the second, industrial valve specialist Rotork, passed the forecast earnings growth test, there are reasons to be cautious about those forecasts.

Nearly three-fifths of the group’s sales are to the oil and gas industry which has been ravaged by the falling oil price.

The fluid systems division has suffered due to Russian sanctions. That said, Rotork has historically proved resilient to oil prices because most of its products are sold into less-volatile mid and downstream activities. The shares remain highly rated.

The third stock to pass the screen is Prudential, whose long-term growth prospects stand out among the UK-listed life insurance companies.

The group has used its mature UK operation to support expansion into more exciting markets. The key area of expansion in recent years has been Asia, where business is benefiting from a burgeoning savings-conscious middle class.

The US is also proving lucrative for the company as the postwar baby-boomer generation reaches retirement.

Prudential’s shares represent far more of a growth story than a dividend story. Indeed, the yield looks paltry compared with many peers, but there is plenty of room for dividend growth in coming years.

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