Broker snap: UBS upgrades Great Portland Estates to 'buy'

14th Jun 2013 12:50

UBS has upgraded its rating for property group Great Portland Estates from 'neutral' to 'buy', saying that the recent pull-back in the share price has created an opportunity to build positions.The broker said that the company's results in May confirmed a "strong performance" with a return on equity (RoE) of 14.5% through improving valuations and delivering accretive developments. A similar RoE is expected next year, it said."Although developments have fallen as a proportion of total assets to 8.3% from 17% at end-FY12, they should rise again as we expect Rathbone Place to be added to the pipeline which we estimate will deliver a 32% profit on cost, or 31p per share over the next three-four years."Meanwhile, a strategy focused on buying, letting and selling buildings in two of Europe's strongest real-estate markets has meant that Great Portland has consistently outperformed its cost of equity (11.2% on average over the past seven years)."Although we expect an average RoE of 9.3% over the next five years, that still implies a fair value of comfortably over 600p. We expect market rental growth to help, but much will be management-driven as it delivers its development projects which are increasingly pre-let before completion, reducing their risk profile."The broker also said that recent acquisitions should deliver short-term income streams which will boost earnings, but these also form the longer-term development pipeline.Though the stock trades at a 4.0% premium to net asset value forecasts for the year ending March 2014, UBS has set its target price of 600p (down from 620p previously) at a 19% premium.The stock was up 3.7% at 547p by 12:50.