LondonMetric merger is in honeymoon phase

It’s always interesting to see how corporate marriages work out. For all the promises that eager bosses make about synergies, savings and new markets, many such alliances are doomed to be unhappy.

Three months on from the merger of LondonMetric Property, a Reit specialising in warehouses, with rival LXi, owner of theme parks and care homes, we got an early glimpse of how this union is progressing, and so far it is showing promise.

Most listed companies make an acquisition at some point. It is the fastest way to grow and should be cheaper than building new assets from scratch in a market you may not be familiar with. But pick the wrong partner and value can easily be destroyed, with time and energy wasted trying to make it work. Abrdn, the entity created by the joining together of Aberdeen and Standard Life in 2017, has been dogged by problems from the start, including massive fund outflows. 

LondonMetric however appears to have avoided any rocky starts. The omens were good — chief executive Andrew Jones has a solid record in mergers, the company has a clear strategy focused on sectors supported by structural shifts such as the growth in online shopping and staycations.

Assets that don’t fit are getting the boot which is also helping to keep debt levels down and crucially, earnings and dividend growth is a priority. High debts and no income have a history of scuppering otherwise solid relationships. 

BUY: LondonMetric Property (LMP)

A period of consolidation after the merger with LXi means the new company has time to reduce its debts and sells off unwanted assets, writes Julian Hofmann.

LondonMetric Property has shown initial promise as the company digests the £1.9bn merger with LXi, which only completed just before the period-end in early March. But the results themselves had a makeshift feel as management gained its bearings and the potential of the merger was only partly clear as the new enlarged Reit takes shape.  

The results indicated the scale of the merger and potential that flows from it. For example, the total portfolio doubled to over £6bn, driven by the £2.9bn that LXi brought to the table. The net contracted rent roll increased by 134 per cent to £340mn. On the liability side of the ledger, loan-to-value crept up marginally to 33.2 per cent, while the cost of debt increased by 50 basis points to 3.9 per cent.

However, there is still plenty of housekeeping to do before the company takes final shape. For instance, LMP had to refinance £625mn of LXi’s secured debt post-completion of the merger and also had to agree increased levels of headroom on its unsecured facilities to avoid costly loan repayments.

Chief executive Andrew Jones told Investors’ Chronicle that selling off assets that are not part of the strategy is now a priority: “Today, we sold £37mn of [Scotland office] properties that don’t fit and we will use the money to pay down debt — holding debt is currently expensive — or to fund new opportunities.” A further £107mn of sales are currently going through legal due diligence.

According to Fleming, this will eventually include the group’s German asset, which came with LXi and consists of the Heide Park leisure site. Currently, leisure activities, including sites such as Warwick Castle, Thorpe Park and Alton Towers, make up 39 per cent of the total income portfolio.

As for the rest of the sector, the direction of interest rates remains the most keenly anticipated event this year and a drop in five-year swap prices would provide the greatest material benefit for LMP. The company earned £6.7mn from interest rate hedges during the year.

Broker Peel Hunt believes that LMP’s focus on logistics will take this segment to above 50 per cent of the total portfolio as management focuses on thematic investments. On a forward price/earnings of 15 times Peel Hunt’s forecasts for 2025, with only a narrow discount to net asset value expected, LMP is not a cheap proposition, but it is a growth company in an otherwise moribund Reit market.

BUY: Hollywood Bowl (BOWL)

The enduring appeal of 10-pin bowling shows no sign of diminishing, writes Jennifer Johnson.

Anyone who has ever thrown a gutterball knows it comes with a unique feeling of humiliation. But fear of embarrassment hasn’t kept the nation’s bowlers away from their local lanes — and nor, it seems, have cost of living pressures.

Hollywood Bowl, operator of more than 71 bowling centres in the UK, posted a record revenue figure in the first half of 2024. Its adjusted Ebitda also rose 10 per cent due to an ongoing cost efficiency drive. Management claims Hollywood Bowl is well insulated from inflationary pressures given that 72 per cent of its sales are not subject to cost of goods inflation.

In its home UK market, like-for-like sales increased 1.3 per cent across the first half, with spend per game up 3.2 per cent to £11.21. Things were even better in Canada, where the group has 11 centres, and turnover was 8 per cent higher than the previous year. With an estate this large, frequent renovations are a fact of life — and three such projects were completed across the six months to the end of March. As a result, net cash fell by £11mn to just over £41mn. 

The £19mn dividend payment and additional investment in new sites also ate into the group’s cash reserves. Going forward, Peel Hunt analysts said they “expect the company to prioritise investment over share buybacks” — and this is certainly in keeping with management’s ambitions. According to chief executive Stephen Burns, the group is hoping to grow its empire to more than 130 centres in the next 10 years. 

Investec analyst Roberta Ciaccia said the company is on track to hit its full-year 2025 targets of 80 sites in the UK and 14 in Canada. “In addition, the static pricing maintained over the past years suggests potential for increases in the future,” she added.

FactSet broker consensus puts Hollywood Bowl’s full-year price/earnings multiple at an undemanding 15, which we think constitutes good value for a cash-generative leisure stock. 

It’s also worth noting that the enterprise value to Ebitda multiple is hovering around 7.8 times — compared with a pre-pandemic average of 8.3. 

Whether people are still eager to bowl in the second half, when both the Euros and the Olympics are taking place, remains to be seen. In any case, the longer-term growth trajectory seems clear.

SELL: Ninety One (N91)

The South African fund manager cannot catch a break as investors head for the doors, writes Julian Hofmann.

The more positive outlook coming from the fund management sector in recent months seems to have passed Ninety One by, as the company reported another punishing year of net fund outflows. The only bright spot for the firm, which started life in Cape Town in 1991, was that negative flows of £9.4bn were at least back in single figures, if only just. The resulting attrition on earnings meant shareholders had to endure a cut to the dividend.

Even with a broad rise in asset prices during the year, funds under management still slipped by 3 per cent to £126bn, with global strategies not proving popular with investors. This time last year, it was alpha funds that were unfashionable. While this may reflect the increasing nationalism of the markets, the flow from equities into fixed income funds has also accelerated as yields on bonds have widened. Institutional investors were responsible for the bulk of the outflows.

In terms of fees earned, the fall in asset levels meant management fees were 8 per cent lower at £558mn. Paradoxically, the company’s improved investment performance produced a 58 per cent increase in performance fees, which were £30.6mn by the end of the year. In response, while acknowledging the issues, management could point to little more than what it views as the company’s “compelling long-term opportunity”.      

If there are opportunities, they are currently difficult to spot, with Ninety One valued at no more than the peer group average, based on Peel Hunt’s forecast price/earnings ratio of 11.2 for 2025. In our view, there are better priced and better quality asset managers available to investors.

Information in this section is not intended to be relied on by any reader for making investment decisions. Independent investment advice should be obtained. The Financial Times Limited does not accept liability for any loss suffered as a result any such decisions.