Since we highlighted shares in German business park owner Sirius Real Estate (SRE) as a speculative buy last year, a key financing issue has been addressed, valuations have flattened out and look set to start rising, the portfolio has been streamlined, and a number of operational improvements have been put in place. All of this means the shares now look a steal trading at a forecast 30 per cent discount to book value, and that's despite a 45 per cent rise since our original tip (22¢, 4 September 2013).
- Big discount to book value
- Operates in growing German economy
- Balance sheet restructured
- Dividend payments to start soon
- Still to dispose of some poorly performing assets
- Occupancy level still relatively low
The changes at Sirius have been spearheaded by a dynamic management team put in place in 2010, headed by chief executive Andrew Coombs. Perhaps the most important action taken has been to put the balance sheet on a more secure footing, through a €40m (£32.5m) share placing and the refinancing of all borrowings with four new debt facilities with average debt maturity of 5.4 years. A further €21m was crystalised through the sale of non-core property (there's another €8m of non-income producing land), and the loan-to-value rate has been reduced to a more comfortable 54 per cent.
Plans have also been put in place to boost the income being generated from the property portfolio which currently has a rather modest 75 per cent occupancy rate. New smart space boxes have been introduced that can be rented out for about €9 per square metre, more than double the current passing rent of €4.47. The company has also introduced a number of simple innovations not usually seen in Germany such as the use of comfortable reception areas for potential customers. This is paying off because some potential renters have signed up on the first visit, a custom relatively unheard of. And since Mr Coombs has been at the helm, conversion of online/telephone enquiries into lettings has risen from 7 per cent to 10 per cent, which is more than that at UK-based Workspace.
| SIRIUS REAL ESTATE (SRE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 32¢ | MARKET VALUE: | €166m | |
| TOUCH: | 31-33¢ | 12-MONTH HIGH: | 33.2¢ | LOW: 21¢ |
| FORWARD DIVIDEND YIELD: | 3.1% | TRADING PROPERTIES: | €7.7m | |
| DISCOUNT TO FORWARD NAV: | 30% | NET DEBT: | 162% | |
| INVESTMENT PROPERTIES: | €421m | |||
| Year to 31 Mar | Net asset value (¢) | Net operating income (€m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2011 | 72.9 | 23.0 | -0.6 | nil |
| 2012 | 62.1 | 25.6 | 0.9 | nil |
| 2013 | 48.4 | 29.3 | 2.7 | nil |
| 2014* | 42.0 | 28.4 | 2.3 | 0.1 |
| 2015* | 46.0 | 29.0 | 2.0 | 1.0 |
| % change | +10 | +2 | -13 | +900 |
Normal market size: 30,000 Matched bargain trading Beta: 0.04 *Peel Hunt estimates | ||||
Greater concentration of assets in the more vibrant Berlin area should also help to boost rental income and valuations. The portfolio is valued at just €40 per sq ft against a replacement cost of €90 per sq ft. Given that a modest 5 per cent revaluation would boost book value by 11 per cent, it's very encouraging that in the first half Sirius reported its first valuation uplift (of 1.9 per cent) since its float in 2007.
There is also real locked-in value in the current three-year €10m capital expenditure programme, which is targeting a 40 per cent return on investment. Not only will this boost income, itt will also reduce capital requirements, and the ensuing boost to cash flow could, on Peel Hunt's estimates, prove sufficient to sustain a dividend yield of over 6 per cent. Sirius has also excelled in streamlining costs - down by €7.8m since March 2010 - and currently has the ability to double the size of the portfolio with just a 20 per cent increase in the cost base.
