Evolution Securities has begun coverage of Canary Wharf's largest shareholder, Songbird Estates, with a Buy recommendation.
Its analysts Harry Stokes, Alan Carter and Paul Pulze - who joined Evolution from Citigroup last year - have a target price of 185p for the company.
Songbird is currently trading at 165p.
"A historically under-valued portfolio, leveraged into City rents, and a 97% geared balance sheet make a heady cocktail," said Evolution.
Their key thoughts on the company are as follows:
► Songbird is a unique company in the sector - Its sole asset is a 69%
shareholding in Canary Wharf Group. It is a virtually pure play on central
London offices with heavy exposure to financial markets.
► Balance sheet has been restored - Its historically high leverage business
model exacerbated the 34% fall in portfolio value in 07 and 08, but a major
re-capitalisation by China Investment Corp and Qatar Investment Authority
has stabilised the business.
► Canary Wharf may attract City tenants - We are forecasting headline City
office rents to rise by 20% in 2010 to £55 per sq ft. CWG's assets are valued off
estimated rents of £37.50. This gap may tempt tenants to consider the Wharf
as an alternative location.
very low, but Nomura vacate their building this year, although the rent is
covered for over four years.
► Spread between recent transactions and portfolio yield - Recent
investment transactions have seen single tenant "bond-type" assets at the
Wharf sold on yield below 6%. The core portfolio was last valued on a yield of
7.3%. Income security is good with an un-expired lease term of nearly 15
years to first break.
► Initiate with BUY recommendation - We initiate with a Buy
recommendation based on a fair value of 185p, in-line with our NAV forecast.
However, 5% rental growth and a 6% portfolio yield would drive NAV to
above 240p.
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