In fact, the price rose sharply from my recommended buy in level of 44.5p to my fair value target range of between 60p to 65p within only two weeks as other investors cottoned onto the value on offer. In the circumstances, some profit taking was in order but this also means that if you missed the first buying opportunity there is enough upside potential on the table again to warrant considering buying now. And with the 14-day relative-strength indicator (RSI) showing a reading below 20 following the profit taking, the shares are massively oversold too.
Upside is also justified by London & Associated Properties' financial performance with results for the year to end December revealing the company’s fully diluted net asset value (NAV) per share on an IFRS basis rose by almost 7 per cent to 59p. On this basis, the shares are priced on a deep 20 per cent discount to book value. That looks unwarranted given that the company has been making major progress in de-gearing its balance sheet, exiting expensive interest rate hedging arrangements, renegotiating credit lines and making headway in its strategy to invest directly or co-invest with third parties across the retail sector.
This has largely been facilitated by the sale in January of London & Associated Properties' main asset, the King Edward Court Shopping Centre in Windsor to the property investment arm of Scottish Widows. The £104.7m sale price equated to a net initial yield of 5.6 per cent which looks a fair price. Moreover, the net proceeds from the sale have made used to further de-gear London & Associated Properties' heavily indebted balance sheet which had been weighed down by around £140m of gross borrowings. The asset sale follows on from the disposal in August of two fully let freehold retail properties - a Primark unit in Chesterfield and the Superdry unit in Windsor - for a total cash consideration of £9.5m.
Impact of disposals
Adjust for all these disposals and by my reckoning net borrowings have plunged from £132m at the end of 2012, to £54m at the end of 2013 to only £38m post completion of the sale of the King Edward shopping centre post period end. In other words, net debt now equates to 76 per cent of IFRS shareholders funds of £50m compared to over 280 per cent at the end of 2012. The company has also exited some expensive interest rate hedging arrangements including those connected to the £70m borrowing facility with Lloyds Bank secured on the King Edward loan. As a result the net liabilities for the remaining hedges, all of which are accounted for in the above net asset figure, have been reduced to less than £10m. It is now the board’s intention to close all of these remaining swap arrangements. True, the cost of getting out of these costly arrangements led to a £15m reduction in EPRA net asset value from £69.9m to £54.6m. Still, EPRA book value of 64.8p is still 38 per cent above the current share price which seems a harsh undervaluation of the shares now that the board can take advantage of the cheaper funding lines available to the company.
In fact, it’s the board’s intention to replace a £44.6m term loan with Royal Bank of Scotland with another lender and has already received a number of offers from alternative funding sources on considerably better terms than those currently enjoyed with RBS. In addition, the company has paid off some of its expensive fixed interest debentures including a £5m debenture accruing interest at 11.3 per cent and maturing 2013 and a £1.7m debenture accruing interest at 8.67 per cent and maturing in 2016. The two remaining debenture stocks held with First Mortgage are a £10m issue at 8.109 per cent maturing in 2022 and a £5m issue accruing interest at 11.6 per cent per year. Maturity of the second debenture has been rescheduled so that £1m will mature in 2016, £1m in 2017 and the balance of £3m in 2018.
As a result, London & Associated Properties' average weighted cost of capital is set to plunge from 7.48 per cent last year as the majority of its debt facilities will now be priced off the current record low interest rates. This debt reduction and reorganisation of the balance sheet has changed the company’s profile dramatically and one that mitigates financial risk substantially, a fact that is not yet factored into the current share price given the hefty discount to book value. There is even a modest income stream for shareholders after the board reintroduced the dividend by proposing a final dividend of 0.125p a share.
Property portfolio
Of course, the investment case still has to stack up even if the shares are trading on a deep discount to EPRA net asset value. I believe it does because the voids on the company's properties are minuscule and the weighted average unexpired lease term is still around eight years. The portfolio includes the Orchard Shopping Centre in Sheffield; Kings Square, West Bromwich; the Langney Shopping Centre, Eastbourne, owned in joint venture with Columbus Capital Management; and Brixton Market, in South London.
Trading at Orchard Square remains strong. Three leases expired during 2013 and all three tenants served notice requesting new leases. Two tenants, Waterstones and Clarks shoes, have agreed new leases at rental levels close to the peaks achieved during the last decade. The third lease renewal is close to being finalised. Interestingly, although Sports Direct is closing its store which it took on as part of the acquisition of the now defunct retailer Republic, there has been "exceptionally strong interest in the space from a number of national retailers" and the company has received several offers. Sports Direct was paying rent of £200,000 per year, and the board are confident the new lease will exceed this figure.
In West Bromwich, the opening of the new Sandwell College with 12,000 students at the rear of King's Square has boosted footfall and the centre is performing well. A new Tesco store and other units in a new development on the opposite side of the high street have now opened and have brought significantly more shoppers into West Bromwich town centre. Furthermore, with the main bus station at the side of King's Square, and the Metro station at the rear, shoppers dependent upon public transport have to pass through the centre to get to all parts of the town.
A major success story is Brixton Markets where London & Associated Properties has two indoor markets let on 25 year leases to InShops Limited, a subsidiary of Groupe Geraud, who operate 200 markets across Europe. Brixton Village was established as a quality retail and restaurant location and one that is fully let and has 160 retailers on the waiting list for any available space. Gross revenue has increased by around 25 per cent in the past three years since the company signed the leases to InShops. Importantly, London & Associated Properties is sharing the upside as the company receives half of the higher rental income in line with a profit share agreement.
Growing asset management division
The recurring income from the property centres aside, the company also generates significant income by offering a full asset management service through London and Associated Management Services (LAMS). Clients include Lloyds Bank and NAMA, the state owned “bad bank” in the Republic of Ireland, and received fees of £620,000 on these projects last year.
In addition, at the end of last year LAMS set up a joint venture with American private equity fund Oaktree Capital Management to acquire three shopping centres: the Vancouver Quarter centre in Kings Lynn; the Rushes in Loughborough; and the Kingsgate in Dunfermline. LAMS invested £2.2m in the joint venture. All are being managed by LAMS
All three centres have suffered from a lack of investment due to the cash constraints of the previous owners, so offer scope to add significant value during the life of the joint venture. Fundamentally they are of good quality and in strong locations and a number of the vacant units are already under offer since LAMS took over the management control in January.
Attractive valuation
So, with a series of property disposals transforming the London & Associated Properties balance sheet, and occupancy levels robust, I see little reason why the shares should be valued 17 per cent below IFRS net asset value when the company now has the fire-power to go out and make value enhancing acquisitions. On a bid-offer spread of 46p to 47p, the shares continue to rate a value buy ahead of the next trading update on Friday, 16 May and the annual meeting on Tuesday, 10 June. My fair value target price on the shares is a range between 60p to 65p.
Please note that I am working my way through a long list of companies on my watchlist that have reported results or made announcements recently including: Pure Wafer (PUR), Eros (EROS), Inland (INL), API (API), H&T (HAT), Record (REC), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Pittards (PTD), Thalassa (THAL), Camkids (CAMK), Taylor Wimpey (TW.), Barratt Developments (BDEV), Bovis Homes (BVS), Aurora Russia (AURR) and Terrace Hill (THG).
■ Finally as a special offer to IC readers purchasing my book Stock Picking for Profit, the first 250 online orders placed with YPD Books and quoting offer code ‘ICOFFER’ will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge. I have published an article outlining the content: 'Secrets to successful stock picking'
