European property investor and developer CLS (CLI) is a good example where shareholders need to remember investment goals set when first putting money into the stock.
We highlighted its potential as a Play of the Week in May, on the assumption that its discount to net asset value (NAV) would narrow. Today's half-year results show considerable progress on this front, helping to push up the share price by 3.6% to £12.02. We therefore believe it prudent that investors reassess the stock, ascertaining whether there's still upside potential from CLS' property developments, or whether the initial goal of trading the stock on a valuation anomaly has been achieved, which would suggest it is time to lock in profits.
Anyone putting money into the stockmarket must always set themselves a goal. You should ask yourself how much profit you believe is possible to achieve for each investment. When this goal is achieved, it is good practice to either take the money off the table or set a new goal. Knowing when to exit an investment can be a difficult task, but it is a good principle to always question why you should remain in a stock.
CLS was trading at a 21.2% discount to its NAV when we highlighted the stock in May. That discount has since narrowed to 1.8%. House broker Liberum Capital says the UK sector average is for property stocks to trade at a 3.1% premium to their NAV, which implies that CLS's shares still have further to run.
The company, which has assets in the UK, France, Germany and Sweden, spent £34.8 million adding five properties to its portfolio in the first half. The momentum has continued into the second period where it has bought two more properties for £6.2 million. Six of its new assets are in London with the other in Germany, which will generate almost 10% of their acquisition costs in annual rent. It has also agreed to buy a £120 million portfolio of properties let to the UK government, on a 12.6% net initial yield.
Long-term growth will be driven by its developments in Vauxhall, South London. Development is underway on the 143,000 square meter mixed-use scheme which will build residential properties, retail outlets, a hotel, student accommodation and a cinema. The project is scheduled to complete next year adding further capacity to its portfolio.
Liberum Capital comments today: ‘We believe the shares continue to look attractive given the above sector average NAV growth prospects (c10% per annum), which include nothing for Vauxhall Square (worth 245p per share), whilst there is further upside risk from future yield contraction.’
We're happy to keep our Plays of the Week trade running, given the clear potential upside in the business. But let CLS's progress be a good reminder that investments must always been reappraised on a regular basis. We'll be keeping a close eye on the stock with a view to locking in profits should it achieve a decent NAV premium.