True, some cautious investors have been banking profits on the shares this year, undoubtedly unnerved by the unstable situation in Russia and the Ukraine. This largely explains why the price has retreated from a high of 86.5p at the start of January. But with the increased geo-political risk resulting in an elevated risk premium embedded in Raven Russia's share price, it also means that the shares are now priced on a 7.5 per cent discount to fully diluted book value per share of 126¢, or 74p a share. That alone makes the shares an attractive medium-term investment, but for good measure there is a short-term investment opportunity to exploit and one worth flagging up.
That’s because Raven Russia distributes its dividends through a tender offer process, the latest of which is a proposed tender offer for shares at 85p each on the basis of one share tendered for every 28 held. The tender offer is open to all holders of ordinary shares on the company's register at 6pm on Monday, 19 May 2014, so it’s not too late to buy the shares now to take advantage of a share buy-back at a 25 per cent premium to the current share price on part of your holding. Combined with the tender offer at the half year stage last year (one share tendered at 80p for every 40 held), which in effect equated to a return of 2p a share, this means the total tender for last year equates to 5p a share, or a third higher than in 2012. This gives an implied yield of 7.3 per cent.
In my view, that chunky yield is reason enough to hold the shares for the medium-term especially since analysts at brokerage N+1 Singer predict Raven Russia will be able to lift recurring EPS by 10 per cent to 11.2¢ this year which would easily cover a dividend of 5.5p a share through a similar tender offer process.
For the short-term, the obvious way to play the tender is to offer as many shares as you want above your pro-rata entitlement as it is quite feasible that some investors will not tender their shares even though the tender price is 25 per cent above Raven Russia’s current share price. If this happens, as was the case last autumn, then Raven Russia will also buy back shares at 85p each from those investors who put in excess applications in the tender process. You have absolutely nothing to lose by doing this.
And assuming your holdings are large enough to start with to make it viable, then you can always buy back all the shares you have tendered at the lower market price of 68.5p. I still feel that would be well worth doing because I remain positive on the medium-term prospects for Raven Russia even though the short-term is being dogged by developments in Ukraine.
A sound business
Let’s not forget that the company has been making strong operational progress and its business is underpinned by robust demand in the warehouse and logistics market in Moscow where there is a chronic under-supply of such property. Vacancy rates in the capital remain below 1 per cent. As a result, demand in Raven Russia's portfolio is robust. At the time of the company’s full-year results announcement two months ago, around 97 per cent of Raven Russia’s 1.4m square metres portfolio of Grade 'A' warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk was let out. In aggregate, this space generates an annualised net operating income (NOI) of $192m (£115m), including pre-lets.
There is decent visibility on the rent roll too. For example, Raven Russia signed a 15-year lease with Dixy, the large Russian supermarket operator, for 39,284 square metres of new-build space at the next phase of the company's Noginsk project in Moscow. The building is scheduled to be delivered in the first quarter of 2015 at a cost of around $48m and will generate total annual income of $8.5m. The 17.7 per cent rental yield on the property is well above the 11 per cent prime yield in Moscow and reflects a higher rental rate due to the specification of the building.
As a result, analysts expect Raven Russia to grow its annualised NOI to around $207m by the end of 2015. In addition, Raven Russia can add between 50,000 and 100,000 square metres of new space annually by building on existing land holdings. Assuming a rental of $130 per square metre, every 100,000 square metres of new space adds $13m to NOI. Analyst Ian Wild at brokerage N+1 Singer calculates that Raven Russia owns permitted land with potential to expand its Moscow portfolio by 38 per cent and provide $48m of additional NOI. Admittedly, that’s going to take time, and the ongoing Ukranian situation means such development will take longer to roll-out, but it does highlight the medium-term potential to add value to the portfolio. The sums certainly stack up as over 300,000 square metres of space was sold in Moscow last year at an estimated price range of between $1250 and $1300 per square metre, according to commercial property experts.
And even though the geo-political backdrop introduces added risk to any investment in the region, Raven Russia is reassuringly fully funded to ride out the current crisis. Cash on the balance sheet is $229m and Raven Russia had gross debt of $815m on its $1.75bn investment and development portfolio at the start of this year. Importantly, only $37m of this debt pile is scheduled for renewals in the next 12 months. The balance has an average term to maturity of 4.7 years and an annual weighted average cost of 7.24 per cent. In fact, over half Raven Russia’s debts have maturity dates of between three to eight years, and a further fifth have maturity dates of between eight to 10 years.
Interest payments are easily covered too: the $75m of annual finance costs on loans are well covered by annual NOI of $198m, while free cash can be redeployed to invest in new projects. It’s also comforting to know that less than 60,000 square metres of the portfolio is due for renewal/break clauses in the next year.
Balancing risk and reward
As one would expect, retailers account for a sizeable amount (around 30 per cent) of Raven Russia's warehouses. As a result, consumer demand in Russia has a direct impact on the amount of rent the company receives for its space and vacancy rates in the portfolio. At the moment that is not an issue, but if Rusia is ostracised from the western world,, and its economy suffers a major slowdown, then this is clearly a risk worth considering.
Currency movements also have an impact too. That’s because although Raven Russia’s rental income is received in Rubles, it is pegged to the US dollar. So although the exchange rate risk is passed onto tenants, further sustained Ruble weakness will ultimately impact tenants and demand for space. Bearing this in mind, the Ruble has devalued 7.5 per cent against the US Dollar this year, but despite the ongoing geo-political situation the Russian currency has actually appreciated by five per cent against the greenback in the two months since Raven Russia reported results in early March. That’s comforting to know and perhaps indicates that the constant stream of bad news hitting the news is largely priced in on currency markets.
In the circumstances, and having considered exchange rates and the potential for further Ruble weakness, I feel that Raven Russia shares still offer decent upside. Moreover, doing a round trip on the tender offer looks a sensible strategy by selling part of your allocations to the company at 85p a share and then buying them back to 68.5p. For the medium-term, and assuming Raven Russia delivers the 8 per cent increase in book value per share to 135¢ (79.5p) by the December year-end as analysts at N+1 Singer predict, rising to 147¢ (86p) a year later, then the current chunky discounts to book value should narrow in time. I maintain my 90p a share fair value target price.
Please note that I am still working my way through a list of companies on my watchlist including: Inland (INL), API (API), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Thalassa (THAL), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis Homes (BVS).
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