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Buy Sirius's gaping discount

Shares in distressed industrial landlord Sirius Real Estate are ripe for a dramatic re-rating over coming months if management can execute a crucial refinancing plan.
September 5, 2013

Shares in Aim-traded property company Sirius Real Estate (SRE) are going so cheap that, for bold investors, it now looks worth taking on looming financing risks. The shares currently trade at little more than half house broker Peel Hunt's cautious estimate of book value for next March. With rents on an upward trend and property valuations showing signs of bottoming out, this huge discount looks too wide given recent progress on refinancing and the potential for further positive news in coming months to put a rocket under the shares.

IC TIP: Buy at 23p
Tip style
Value
Risk rating
High
Timescale
Long Term
Bull points
  • 48 per cent discount to book value
  • Focus on economically healthy Germany
  • Valuations are bottoming out
  • Growing rents
Bear points
  • Excessive debt load
  • Refinancing deadlines

Once part of the ill-fated Dawnay Day empire, Sirius raised money in 2007 to assemble a portfolio of suburban office and light-industrial estates in Germany - not unlike a regional German version of London-based Workspace. But the project succumbed to the credit crunch. Property write-downs undermined Sirius's capital structure and exposed the weakness of its corporate structure, which employed external management that proved hard to hold to account.

This second issue has been addressed, albeit at some expense. Sirius had to pay €5.1m (£4.3m) to buy in its management company last year. The executive team and board have also largely been replaced over the past three years, partly as a result of haranguing by Boston-based activist hedge fund Weiss Asset Management in 2011.

But the first problem looms as large as ever, with €286m of debt against just €151m of shareholders' funds at the end of March. Much of the debt is about to expire. A €42.2m loan from RBS falls due at the end of this month, and a €151m package from BerlinHyp matures next March. The resulting uncertainty largely explains the huge discount at which the shares trade.

SIRIUS REAL ESTATE (SRE)

ORD PRICE:22¢MARKET VALUE:€76.7m
TOUCH:21-24¢12-MONTH HIGH:26¢LOW: 17¢
DIVIDEND YIELD:nilTRADING PROPERTIES:€27.7m
DISCOUNT TO NAV:48%NET DEBT:179%
INVESTMENT PROPERTIES:€410m

Year to 31 MarNet asset value (¢)Pre-tax profit (€m)Earnings per share (¢)Dividend per share (p)
201068.3-31.7-9.9nil
201169.13.40.8nil
201257.1-31.1-10.3nil
201347.6-29.5-9.5nil
2014*42.04.81.3nil
% change-12%-116%-114%-

Normal market size: 15,000

Matched bargain trading

Beta: 0.1

There are noteworthy downside risks associated with the refinancing issue. If we imagine the very worst - that the banks pull the plug on Sirius, forcing it to sell properties in a hurry - a liquidation that destroyed 17 per cent of the last reported carrying value of its property of €438m would see shareholders break even, while a 34 per cent loss would entirely wipe out equity holders.

But it is hard to see why the company would be sent down this route. Following a much-needed cost-cutting drive, the portfolio is profitable, with pre-tax rental profits of €8.7m last year - a yield on net assets of 5.8 per cent. That may explain why Sirius managed to refinance the first part of its BerlinHyp facility via a German private placement in July. The terms it received - a rate of 4.3 per cent for nearly 10 years at a loan-to-value (LTV) ratio of 65 per cent - are very encouraging, although, a diluative €6.5m equity raising at 21¢ was also needed to plug a repayment and arrangement fee shortfall.

If the refinancing continues on these lines, assisted by non-core property disposals and possibly further equity issues, shareholders should make big gains. Chief executive Andrew Coombs reckons this September will be the trough for property valuations, and the rental market seems supportive.