Investing in a real-estate company that specialises in building and letting commercial property mainly around Moscow might not sound like a good idea at the moment. After all, there is no telling how or when the current tensions in Ukraine will be resolved. In fact, there is a danger that any escalation could result in sanctions affecting cross-border transactions. However, while political posturing continues to overshadow investments focused on the region, commercial property group Raven Russia (RUS) remains a class act, with underlying profits doubling last year.
- Attractive dividend
- Significant discount to forecast NAV
- Shortage of quality warehouse space
- Significant operational gearing
- Uncertainty in Russia
- High debt costs
Since Raven's shares peaked earlier this year, the price has tumbled 26 per cent, and now stands at a 21 per cent discount to forecast NAV for the end of this year and a 27 per cent discount to end-2015 NAV. Discounts can always widen, but if a solution to current tensions can be found, Raven Russia's shares look set for a smart bounce back.
From an operational standpoint, the company is only now starting to benefit from several years spent getting its development portfolio to the point where it is generating a significant rental stream. Raven has now built up a portfolio of around 1.4m sq metres of quality space spread across a range of local and international businesses, retailers, distributors, manufacturers and logistics providers. There is a peak in lease maturity in 2016, which represents a risk, but the company is taking action well in advance to deal with this.
What really underpins the investment case for Raven is that there is a chronic shortage of quality warehouse space in Russia. As a result, Raven's occupancy rates are running at an impressive 97 per cent. Average unexpired lease terms are a comfortable 4.6 years, and there is a portfolio of undeveloped permitted land to support further organic growth. In fact, analysts at N+1 Singer reckon there is potential to expand the Moscow portfolio by 38 per cent, generating an additional $48m (£29m) of net operating income.
| RAVEN RUSSIA (RUS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 64p | MARKET VALUE: | £482m | |
| TOUCH: | 64-66p | 12M HIGH: | 87p | LOW: 63p |
| FORWARD DIVIDEND YIELD: | 9.4% | FORWARD PE RATIO: | 9 | |
| DISCOUNT TO FORWARD NAV: | 27% | DEVELOPMENT PROPERTIES: | $119m | |
| INVESTMENT PROPERTIES: | $1.63bn | NET DEBT: | 95% | |
| Year to 31 Dec | Net asset value (¢)* | Pre-tax profit ($m)* | Earnings per share (¢)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 118 | 9 | 0.2 | 3.0 |
| 2012 | 125 | 35 | 5.1 | 3.8 |
| 2013 | 126 | 70 | 10.3 | 5.0 |
| 2014* | 136 | 97 | 11.2 | 5.5 |
| 2015 | 147 | 107 | 12.4 | 6.0 |
| % change | +8 | +10 | +11 | +6 |
Normal market size: 5,000 Matched bargain trading Beta: 0.21 *N+1 Singer forecasts, adjusted NAV, and recurring PTP and EPS figures £1=$1.68 Last IC view: Buy, 77p, 11 Mar 2014 | ||||
Raven Russia also benefits from a stable cost base, so any increase in rental income quickly drops through to the bottom line. Indexation on rents will also boost income, and management has the ability to add up to 100,000 sq metres a year simply by building on existing land. In terms of rental income, and assuming rents of $130 per sq metre, each 10,000 sq metres adds $1.3m of net operating income when fully let.
The company has a progressive dividend policy, with payments made through a series of tax efficient tender offer buy-backs and, using conventional metrics, the prospective payout is still well covered by after-tax earnings. Net debt is fairly high at $851m, which swallowed up $101m in interest payments last year, but a cash pile of $229m is available to fund further development.
