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OPINION

Hidden value

Hidden value
November 20, 2012
Hidden value
IC TIP: Buy at 18p

But updating a raft of profitable holdings is easy. Researching and formulating reasoned advice on shareholdings that are underwater is a completely different matter even if, on reflection, you decide that the investment case remains sound. So, with this in mind, I am revisiting one of my real-estate holdings from my 2011 Bargain Share portfolio; First Property (FPO), a company that has yet to enjoy the re-rating it rightly deserves, but one that, in my view, offers investors a decent entry point at the current price of 18p. This is modestly below the level I originally recommended buying at 21 months ago. It's timely, too, because the Aim-traded commercial property fund manager is due to announce results for the six months to 30 September 2012 on Wednesday 5 December.

Shrewd management

To recap, the company is led by chief executive Ben Habib, who made the rather smart decision to exit the UK commercial real-estate market before the bubble burst and turn the company's attention to Poland, the only country in the European Union that didn't fall into recession during the financial crisis in 2008-09. It proved a sound decision at the time as First Property benefited from the upside on two directly held office properties in Warsaw, as well as the significant funds flowing into the eastern European property market. Investors have done rather well, too, as First Property's investment performance is ranked number one versus Investment Property Databank's (IPD) Central Eastern European universe over the three, four, five and six years to 31 December 2008, 2009, 2010 and 2011.

However, the eurozone financial and economic crisis has clearly changed the dynamics of the eastern European property investment market, which prompted Fprop Opportunities, the company's 84 per cent-owned Polish-focused fund, to make the sensible decision to suspend purchases of properties. First Property has also taken the opportunity to bank profits on one of its directly held properties in Mokotow, Warsaw, which it bought five years ago. The ungeared property was sold for £2.3m a few weeks ago, which means the asset generated a healthy internal rate of return for the company of 12.8 per cent a year under ownership. Following the sale, First Property has one remaining direct property holding, Blue Tower, an office tower in the central business district of Warsaw, in which it has a 28 per cent interest. It has proved a shrewd investment, rising 54 per cent in value from $12.9m (£8.1m) in December 2008 to $19.7m at the end of March this year. In this time, net rental income has increased from $1.08m to $1.97m, which means that the property is still yielding 10 per cent. First Property conservatively holds Blue Tower at cost in its accounts.

It may therefore come as a major surprise to many of you that the marked change in the investment climate in eastern Europe has failed to hold back First Property. That's because the company's management team also showed their smart market timing by re-entering the UK property market a couple of years ago following the collapse of commercial property prices. The first fund, UK PPP, is worth £106m and is almost fully invested in discount UK retail parks. Mr Habib is also making progress in raising new funds to create a second portfolio focused on high-yielding UK commercial investment property and is working on another fund to invest in debt secured on income-producing UK commercial property. Moreover, those eastern European ambitions haven't fallen by the wayside as the plan is to expand assets under management in Fprop Opportunities.

Sound financials

True, the weakening euro has resulted in a fall in the company's total assets under management from £365m at 31 March to £350m at the end of September, but it's worth noting that the income generation of client funds remains "robust". And the combination of management fee income and net rents on directly held properties means that the substantial dividend of 1.08p a share is safe. It is well covered, too, as pre-tax profits of £4m in the financial year to March 2012 produced EPS of 2.73p. That healthy payout was one of the reasons I recommended buying First Property's shares at 18.5p in February last year. It is also a key reason why the shares have held up so well. In fact, the 5 per cent share price fall compares rather well with the 30 per cent collapse in the FTSE Aim index in the same 21-month period. Moreover, factor in 1.82p a share of dividend income we have received and the holding is actually showing a modest profit.

There is hidden value in the shares, too, because the company's March 2012 book value of 15.6p a share is clearly conservative given the treatment of property held. In fact, analysts estimate that the company's own cash, property and investments are worth almost 20p a share at market value, which leaves a highly-profitable fund management business in the price for nothing. Trading on seven times earnings and yielding 6 per cent, the shares, priced on a spread of 17.25p to 18p, rate a decent medium-term buy.