Some investors will instinctively avoid a company whose business depends on Russian property rights. Yet Raven Russia's defenders point out that it makes its profits not by, say, selling Russia's natural resources, but by building warehouses - not a politically sensitive proposition. Chief executive Glyn Hirsch says property rights were a worry when he first looked at the Russian property market in the late 1990s, but adds that Vladimir Putin's reforms have resolved the problems. "There's a huge disparity between perception and reality," he laments.
This is crucial because the investment case for Raven Russia in other respects is extremely compelling. The company's shares offer a rare combination of asset-backing, dividend yield and strong growth potential, which has attracted the support of some famously risk-averse fund managers, notably Neil Woodford at Invesco Perpetual, whose fund owns a 22 per cent stake.
Raven Russia builds warehouses around Moscow and leases them to multinationals that supply goods into the metropolis. Rents in this micro-market are recovering sharply from recession. Having started 2011 at about $115 (£72.09) per square metre, they finished the first quarter at $125 and were at $135 by June, according to property broker Jones Lang LaSalle.
RAVEN RUSSIA (RUS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 58p | MARKET VALUE: | £303m | |
| TOUCH: | 57-58p | 12-MONTH HIGH: | 71p | LOW: 47p |
| DIVIDEND YIELD: | 5.2% | TRADING STOCK: | nil | |
| DISCOUNT TO NAV: | 20% | |||
| INVEST PROPERTIES: | $1.08bn | NET DEBT: | 56% | |
| Year to 31 Dec | Net asset value (¢) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share † (p) |
|---|---|---|---|---|
| 2007 | 227 | 115.5 | 22.7 | 6.5 |
| 2008 | 143 | 189.4 | -38.8 | 3.0 |
| 2009 | 114 | -148.3 | 28.5 | 1.0 |
| 2010 | 116 | 55.7 | 8.4 | 2.0 |
| 2011* | 117 | 105.7 | -1.2 | 3.0 |
| % change | +1 | +90 | -114 | +50 |
Normal market size: 5,000 Matched bargain trading Beta: 1.0 *Singer Capital Markets forecasts (NAV and earnings not comparable with earlier years) † including payments via a tender offer £1 = $1.61 | ||||
Strong demand from consumer-goods companies looking to tap into Russians' rocketing buying power is one half of the story behind this rental growth. The other half is tight supply. Rents of $140 per sq m sparked a development boom in 2007 that led to a collapse in rates in 2009. But little has been built since, and vacancy levels have returned to their pre-crisis lows.
The profitability of Raven Russia's business model is also enticing. Its warehouse rents yield 12 per cent, but it can borrow money at 7 per cent. In time, that will generate enough cash to fund expansion while leaving lots left over for dividends. Raven has not reached this point yet because it is still filling the space it built during the recession, when it was lumbered with a large development pipeline. But in such a tight market it is sure to find tenants. It leased 188,000 sq m for an additional $28m of rental income in the first half alone, and by 30 August the vacancy rate had fallen to 16 per cent.
Unusually, investors have three ways of buying into this story. During the 2009 crisis, Raven Russia raised emergency cash by issuing a combination of preference shares and warrants on terms dictated by Mr Woodford. The preference shares, which are like irredeemable bonds, pay a 12p coupon and currently yield an eye-catching 9 per cent, while the warrants act as a geared play on the ordinary share price.
