Quintain Estates

7:21 a.m. Fri 31 Dec 2004

Real estate developer Quintain Estates reported a 33% growth in turnover (to £37.4m) but an 18% drop in operating profits (to £9.6m) in its results for the first half of 2005.

Quintain's business is divided into three divisions: Special Projects include large, high profile projects such as the 55 acre development of land adjoining the Wembly stadium. The Main Portfolio comprises direct investments in property and spans a wide range of sectors. Q3P is the company's finance business.

The company is largely UK focused, generating 95% of revenue and profits in the UK. Rental income makes up the bulk (65%) of revenue and operating profits (80%). Special projects account for a quarter of the rental income.

A higher level of income from property trading boosted turnover by 33% to £37.4m. Net rents fell by £0.8m to £14.8m as a result of property disposals while income from leisure operations was up 3.7%

The company sold trading and investment assets worth £149m, taking advantage of the strong market during the year. Further disposals, worth £93m have taken place since the period end.

Administration expenses grew by 41% to £10.6m due to higher staff costs and headcount on account of the major projects at Wembley and Greenwich on which the company's growth prospects rest.

Operational cashflows have improved to £7.7m (+15%) but has been expended entirely on the servicing of borrowings; overall cashflows have improved due to property disposals.

Rental income is likely to reduce further next year due to the sales programme and turnover will also be adversely affected by the temporary closure of Wembley Arena. With the property market slowing, profit from disposals is also likely slow. Administration expenses are likely to climb further with construction starting on the Wembly project.

The short terms earnings outlook therefore is negative, with falling turnover and rising costs. The medium term outlook is uncertain but the overall property market is expected to contract over the next few years.

The Wembly project could be source of long term growth but our concern is its size (£1.3bn), the timing (in an overheated market) and the possible effects on gearing, although it has improved to 48%. Interest cover (excluding the exceptional interest cost on the debt restructuring) has also improved to 2×.

The share trades at 487.5p - a 30% premium to NAV in a sector that generally trades at a discount to NAV. The market appears to have factored in growth from the Wembly project. The yield is 1.9%