Quintain Estates: Final results ‘05

9:52 a.m. Tue 07 Jun 2005

Quintain estates announced a 30% growth in turnover (to £78.4m) but a 2% drop in pretax profits (to £15.8m) for the year to March 2005. The growth in turnover was due to a 14 fold increase in trading proceeds (to £25.8m from £1.8m last year). Profits from property trading were £3.8m compared to £0.2m last year. NAV rose by 22% to 495p.

Margins have dropped sharply; despite the strong growth in turnover gross profits declined marginally to £39.6m (2004: £40.4m). The average gross margin has declined to 50.6% from 66.8% last year, the decline evident in all departments except rental income where margins rose to 75.8% (2004:71.1%) although this improvement was negated by a 14% decline in rental income due to disposals. Property trading margins were 14.8% (2004:16%), leisure 51.5% (2004:54.2%) and other income 50.6% (2004:66.8%).

The company says £76m of realised profit (over cost) from the sale of investment properties is shown as a transfer to revenue reserves and not as income in the profit statement due to the accounting policies followed. While this statement is correct, it applies to all companies in the sector.

Accounting standards require that investment properties be shown in the books at open market values. This involves periodically adjusting the value of the investment property upwards or downwards the resulting surplus/deficit being transferred to revenue reserves. When the property is sold, only the surplus over the value recorded in the books (regardless of original purchase price) is treated as a profit. Since the properties are already valued at open market prices, the profit recorded is usually small. The increase in the value of investment properties will contribute to the increase in the company's NAV.

Higher administrative expenses were responsible for the decline in pretax profits. Administration expenses increased by 20% to £19.1m mostly due to additional staff costs (higher headcount and performance related bonuses) which the company justifies by pointing to the increase in NAV.

The company reported that it had made significant progress in two large special projects. Construction has started at Wembley, (unconditional planning consent for Phase 1 comprising 5.3m sq ft of mixed-use development being received). Planning consent has also been received for Millennium Square, part of the £5 bn, 20-year regeneration of 190 acres on the Greenwich Peninsula, London. The first land sales of Millennium Square are expected by Spring 2006.

The company's longer term prospects will depend on the Wembly project and the Greenwich project, both of which seem to be progressing well. We are not bullish on the property market in general and today's Halifax house price index does not look very encouraging. House prices fell a second month running in May, bringing the annual rate of increase to its weakest in four years. HBOS expects a 2% decline in house prices this year.

Weak house prices could affect consumer spending (as people start to save more as the value of their investment in property starts to fall) which in turn will affect demand for commercial property. Retailers including Woolworths, Marks & Spencer and Next have all reported weaker sales this year. Same-store sales for all UK retailers fell 2.4% in May, the biggest annual decline for that month since 1995, according to the British Retail Consortium.

The share trades at 533p - at a 7% premium to NAV in a sector that generally trades at a discount to NAV. The yield is 1.9%