It has also meant that investors have been far more inclined to look at solid investments in the real estate sector in order to take advantage of the attractive yields on offer especially when shares in these companies are trading on anomalous discounts to book value. They have been wise to do so because whether we like it or not one of the reasons for so called ‘quantitative easing’ is to create a wealth effect which is supportive of valuations across a whole range of asset classes, including equities as a whole, and property in particular.
As a result of these factors, I am in the fortunate position to report back good news on virtually all the real estate plays I have recommended in the past couple of years. A number of these need updating.
Far eastern delights
London-listed property developer Macau Property Opportunities (MPO: 206p), the closed-end investment fund registered in Guernsey and listed on the London Stock Exchange's main market, has announced the sparkling set of first-quarter results I anticipated when I advised buying the shares at 177p ('Far eastern delight', 6 September 2013) and a few weeks later when the price was 193p (‘Blue sky territory’, 24 September 2013).
Launched in 2006, the company targets strategic property investment and development opportunities in Macau - the gaming industry equivalent of Las Vegas - and Mainland China's western Pearl River Delta. Its portfolio mainly comprises a mix of well-positioned residential, retail and logistics property assets.
Importantly, growth in the gaming industry is showing no signs of slowing down. For example, Macau's gaming revenues rose by 16.7 per cent to $32.6bn (£20.3bn) in the first nine months of 2013 and are expected to top $43bn this year. If experts at US investment bank Wells Fargo prove correct in their expectations then gaming revenues could hit $107bn by 2018, representing an annual growth rate of 20 per cent over the next five years. In the circumstances, it’s only reasonable to expect the city's economy to be buoyant for some time yet.
Gaming revenues are not the only thing that's booming in the country: according to The Economist Intelligence Unit, Macau, which has a population of 568,000, is expected to report a 14 per cent increase in GDP this year. Retail sales are rampant, and have doubled in the past three years. Industry experts predict they will rise a further 19 per cent to $8bn this year alone. Given this backdrop, it's hardly a surprise that rental values for luxury brands and high-end retailers are buoyant. It also means that demand for the company's apartments is well underpinned.
Macau Property has been making some eye-watering returns on its investments which is why the company’s adjusted net asset value rose by 4.5 per cent to 413¢ a share in the three months to end September. At the current exchange rate of £1 = US$1.60, this equates to a 258p a share and means Macau Property shares are being rated on a near 20 per cent discount to book value.
Anomalous valuation
In my opinion, this is not only an attractive valuation, but an anomalous one too considering the growth potential in the company’s residential assets. For instance, we can realistically expect significantly more upside from The Fountainside, a development of 38 apartments and four villas encompassing an area of 80,000 sq ft and which has been revalued at $65m, up from $42.2m in June 2012. Macau Property has so far invested $21m in The Fountainside and has pre-sold 20 apartments covering an area equivalent to 35 per cent of the total square footage of the development. The project is now in its final stages and marketing of the villas will begin soon.
Bearing this in mind it’s worth noting that the first sales in the scheme (in late 2010) achieved average capital value of HK$4,500 per sq ft (£360 sq ft), but according to analysts at brokerage Liberum Capital prices of HK$9,500 per sq ft (£760 sq ft) are achievable on the remaining sales. Assuming half the sales complete at these prices in the second half of 2014 and first half of 2015, then this will add 23p a share to Macau Property’s net asset value.
It also seems lost on investors that Macau Property is very conservatively geared and only has a loan-to-value ratio of 24 per cent on its $524m portfolio. Or put it another way, once the company’s agreed $64m (£40m) sale of its Zhuhai properties, APAC Logistics Centre and Cove Residence, completes in February next year, this will wipe out half the company’s borrowings of $124m. Analysts at Liberum expect 13p of the 45p a share proceeds from that sale to be returned to shareholders, implying at the current share price the prospective yield is around 6.3 per cent. It’s not a fire sale either as the disposal has been priced at a 42 per cent premium to the carrying value of $45m in the June 2013 accounts and that's after a 56 per cent year-on-year valuation uplift.
Share buybacks supportive
Investors are also ignoring the fact that Macau Property has been aggressively buying back its shares to narrow the discount they were trading at to book value. In April, the company purchased 3.79m shares at prices between 142p and 145p and acquired a further 1.5m shares at 168p in August. These follow on from the repurchase of 1m shares at 140p at the end of March, and 7.22m shares repurchased at an average price of 108p in the second half of last year. These purchases have shrunk the issued share capital by 12m shares to 88.5m shares.
It's a smart move too because, by repurchasing shares in this way, the company is immediately enhancing net asset value per share and taking institutional stock off the market. As a result, this stock repurchase mechanism is helping to underpin the steady increase in the company's share price. Moreover, share repurchases remain a top priority for the company's board as long as the share price trades on an unwarranted discount to the book value. In other words, it’s only reasonable to expect the share price discount to narrow further as further repurchases are made.
Needless to say, I continue to rate Macau Property shares a value buy on a bid-offer spread of 203p to 206p and feel that my 220p target price is now too conservative. Analysts at brokerage Liberum clearly do as they raised their own target price from 143p to 234p post the company’s full-year results in late September.
I have a strong feeling they could be right and I am lifting my fair value target price from 220p to 230p to factor in the likelihood of a substantial capital return next year, news of which we can expect when the sale of the APAC Logistics Centre and Cove Residence development completes in February. Buy.
Another smart deal
The board of Macau Property are not the only property players pulling off smart deals. The management team at Aim-traded property fund manager First Property Group (FPO: 26p) announced yet an interesting property deal at the end of last week.
To recap, I advised buying shares in the company a year ago when the price was around 18p ('Hidden value', 20 November 2012). Since then, we have picked up an interim dividend of 0.33p a share and a final payout of 0.75p a share in September. Combined, this gives an annual dividend of 1.08p, so at the current price of 26p the shares still offer a decent yield of 4.2 per cent. The payout was covered twice over by EPS of 2.2p in the 12 months to end March 2013, so looks safe - especially as currency adjustments understate the true EPS figure by quite some margin.
Importantly, the investment case remains sound, so much so that I reiterated my buy advice a couple of months ago when the price was 22.5p (‘Shares with hidden value’, 12 August 2013). I have little reason to change that positive view.
First Property's latest deal involves the company buying a further 19.7 per cent interest in its one remaining directly owned property holding, Blue Tower, an office tower in the central business district of Warsaw. This means the company now has a 48.2 per cent interest in the property. It has proved a shrewd investment so far, rising by 52 per cent in value from $12.9m (£8m) in December 2008 to $19.5m (£12m) at the end of March this year. The property contributed pre-tax profits of £962,000 last financial year to the company, or around a quarter of group profits. First Property’s board calculates that the blended pre-tax rate of return on equity of the 48.2 per cent share in Blue Tower will be an eye-catching 38 per cent.
Interestingly, First Property conservatively holds Blue Tower at cost in its accounts, which means that the net asset value of the company - £18.5m at the end of March, or 14.4p a share - understates its true worth. In fact, mark the Warsaw property to market value and First Property's book value rises by 3.3p to 17.7p a share. It's also worth noting that First Property values its interests in the funds it runs at cost. Mark these interests to market value and the carrying value of these investments adds £3m, or 2.3p a share, to book value and means that the company's net asset value is actually closer to 20p a share, rather than the 14.4p stated in the accounts.
Positive news flow
At the end of August, First Property’s funds had £348m assets under management, of which around 70 per cent of the properties are located in Poland, and a further 26 per cent in the UK. The good news is that the Polish commercial real estate market is starting to improve so we can realistically expect positive newsflow on property deals there in the coming months.
First Property is also taking advantage of the improving housing market in the UK and has announced two interesting deals in the past few months. Firstly, it has formed a partnership with clients to invest in office buildings with a view to converting these to residential use. The partnership, which is closed ended, has a life until May 2018. Clients are committing £12m to the venture, with an intention to increase this to £40m within three months. First Property will commit 5 per cent of the equity raised subject to a limit of £2m and manage the partnership, but will not levy any fees for its services. It will instead be paid 20 per cent of the profits earned by the partnership, as these are earned, subject to claw back in the event of losses.
This is the second deal the company has done in this area of the property market in recent months. In July, First Property invested £3.4m of its £13m cash balance acquiring seven largely vacant offices, one in Bracknell in the Thames Valley and the others in Old Woking, Surrey, which it plans to convert into housing. This looks a sensible move as it exploits the oversupply of offices in the regions in order to sell these properties as residential units into what is a buoyant housing market in the south east of England, and one underpinned by a housing shortage. Priced at only £62 per sq ft, First Property has negotiated a good deal too.
So, with newsflow positive, and the share price showing positive momentum, ahead of First Property’s interim results next month, I rate the shares a decent medium-term buy on a bid-offer spread of 25.25p to 26p. I am also upgrading my target price from 27.5p to 29.5p, which if achieved would coincide with a return to the 2000 high. It’s not an unrealistic possibility either if the company's management continues to pull off further shrewd deals targeting the residential property market.
■ Finally, as a pre-Christmas offer exclusive to Investors Chronicle readers, all telephone orders placed with YPDBooks for my new book Stock Picking for Profit will receive complimentary postage and packaging. This offer is strictly for a limited period, is subject to stock availability and applies to only telephone orders placed until Friday, 15 November 2013.
Please note the book is only being sold through YPDBooks and no other source. Full details of the content of the book is available online at www.ypdbooks.com. If you would like to take advantage of this offer, please contact YPDBooks on 01904 431 213 and quote reference 'ICOFFER'. The book is priced at £14.99. Internet orders will continue to incur the normal postage and packaging cost of £2.75. I have also published an article outlining the content of the book: 'Secrets to successful stock picking'.
MORE FROM SIMON THOMPSON ONLINE....
In the past week I have published six other articles in the past fortnight on the following eight companies:
■ Greenko ('Value Plays', 4 November 2013)
■ KBC Advanced Technologies ('Value Plays', 4 November 2013)
■ Trading Emissions ('Cash rich Trading Emissions undervalued', 5 November 2013)
■ Eros ('Get ready for some US price action', 6 November 2013)
■ Air Partner ('Buy the break-out', 7 November 2013)
■ 32Red ('Hitting the jackpot', 11 November 2013)
■ Inland ('Bargain shares updates', 12 November 2013)
■ Terrace Hill ('Bargain shares updates', 12 November 2013)
