In the circumstances, it may seem remarkable that shares in Aim-traded Dragon-Ukrainian Properties & Development (DUPD: 34p), an owner and developer of shopping centres and residential properties in Ukraine, are unchanged on my recommended buy in price when I initiated coverage nine months ago (‘Super sleuthing’, 19 September 2013).
One reason for the resilient performance is down to the fact that investors are taking a more sanguine approach to the troubles. The recently agreed $17bn (£10.1bn) two-year stand-by loan bail-out programme with the International Monetary Fund (IMF) provides long-awaited support for both government and Ukraine’s central bank's financing needs. The IMF loan will also unlock aid from other international lenders, with the total Western support package for Ukraine estimated at $27bn, covering a substantial share of government debt service and gas import purchases for the coming two years. It should help stabilise the banking sector, too. The financial rescue programmes also pave a way to economic reforms, which should in turn result in an improved investment climate and positive structural changes in the Ukrainian economy in the mid term at least, albeit expect tighter fiscal policy near term.
Another reason for the relatively robust share price performance is down to the fact that Dragon-Ukranian Properties' has changed its investment policy and plans to carry out an orderly disposal of its assets to return cash back to shareholders. So with the shares trading at a 60 per cent discount to net asset value of 88p, there is a hefty ‘margin of safety’ built into the current price for medium-term investors to take advantage of.
In fact, at the end of last year, Dragon-Ukranian Properties had a cash pile of $24.7m (£14.7m) which at current exchange rates equates to 13.5p a share. In addition, the company owns a 12.5 per cent stake in London-listed Arricano (AIM: ARO - $2.50), one of the leading real-estate developers in Ukraine specialising in operating shopping centres, and one that listed its shares on Aim at the end of last year. This shareholding is in Dragon-Ukranian Properties' books for $32.7m (£19.5m). In addition, the company has sold off its stake in Henryland, the owner of six retail schemes in different regions of Ukraine, of which three are fully operational and cash-generating. Dragon-Ukranian Properties' has already received $5.3m of the $9m net proceeds and the balance of $3.7m is expected in the final quarter of this year.
This means that the combined value of the shareholding in Arricano, cash on Dragon-Ukranian Properties' balance sheet and the outstanding cash due from the sale of the Henryland holding account for all of its market value of £37m. It also means that shareholders are getting a free carry on £59m, or 54p a share, of assets which are in effect in Dragon-Ukranian Properties' share price for nothing.
Arricano valuation well underpinned
The stake in Arricano certainly looks well underpinned. The company's four shopping centres in Ukraine have 113,000 square metres gross letting area and are located in the capital Kiev (RayON shopping centres), Kryvyi Rih (SEC Sun Gallery), Zaporizhzhia (SC City Mall) and Simferopol (SC South Gallery). In addition, the company has an interest in the Skymall centre in Kiev, which has 68,000 sq metre gross letting area. All of these properties were developed and are operated by Arricano and, with the exception of the Sky Mall property that is co-owned with a joint venture partner, all are managed by Arricano's property management team.
Retail tenants include international brands that are present in the Ukrainian market, whether through direct ownership or regional franchises, as well as leading national brands. Overseas retailers include Fiba (Marks and Spencer), New Yorker, Benetton and Topshop. Importantly, a key driver in each of the above projects has been securing strong anchor tenants to drive footfall and entice other tenants to sign leases. Auchan, a leading international hypermarket brand, is the anchor tenant in three of Aricanno's shopping centres. Furshet, a leading Ukrainian supermarket chain of which Auchan is a shareholder, is the anchor tenant at the fourth project and the RayON shopping centre in Kiev is anchored by a supermarket, Silpo, the main brand of leading Ukrainian retailer Fozzy Group.
Vacancy rates are miniscule at less than two per cent and the company is conservatively funded with a loan to value ratio of only 25 per cent on the properties. Loans mature between 2018 and 2020 so there are no near-term funding issues.
In the circumstances, it’s very rationale for investors to be taking such a sensible view on Dragon-Ukranian Properties' shares, and its asset disposal programme, since it’s clear to me that the aformentioned 54p a share of additional assets can be realistically released in the coming years and returned back to shareholders. Importantly, Dragon-Ukranian Properties' has no funding issues of its own as it has a debt free balance sheet.
A sensible plan
It may come as an even greater surprise to some investors that Dragon-Ukrainian Properties' has been enjoying a fair amount of success on its 10 projects. In fact, six of these are now cash generative.
In terms of the residential developments, the company’s Obolon project in an upmarket district of Kiev is proving very popular. The one hectare development of 378 apartments and 3,627 square metres of commercial space is in the company’s books for $29.4m, or 16p a share. Dragon-Ukrainian Properties managed to attract a partner who agreed to share some of the development costs in exchange for $5m worth of premises in the building. As a result construction commenced on the first tower a year ago and a pre-sales campaign started last October. To date, the company has booked $8.5m of sales on the development.
In addition, Dragon-Ukrainian Properties has a 14 hectare residential development at Greenhills, around six miles outside Kiev. This is the first North American-style cottage community developed in Ukraine and encompasses 178 land plots of which 37 have been sold, including nine last year. The development is in the books for $17.8m, accounting for 9.7p a share of the net asset value of 88p. Another promising development is Rivierra Villas, an elite cottage community near Kiev. To date 18 land plots have been sold, and the first street out of four has been completed. Currently, seven homes are available for sale. Dragon-Ukrainian Properties owns a 59.6 per cent interest in the 10 hectare development which is in its books for $12.5m, or 7p a share.
Therefore, by my calculations, about 33p a share of the company’s net asset value is accounted for by the investments in Obolon, Greenhills and Riviera Villas, all of which are located in affluent areas in and around Kiev; and a further 34p is accounted for by cash on the balance sheet, the shareholding in Arricano and the cash due from the sale of Henryland.
Dragon-Ukrainian Properties’ remaining assets are largely accounted for by investments in land in the Kiev suburbs. Of the 502 hectares of land holdings, just under 20 hectares has now been rezoned for commercial and residential development. The company is in the process of selling off this land to turn it into cash. Admittedly, it is going to take time to realise value from this land the limited market activity and weak mortgage lending market. However, it clearly has some value. It is currently in Dragon-Ukrainian Properties’ accounts for $41.9m, or the equivalent of 23p a share.
Target price
So with six of Dragon-Ukrainian Properties' 10 projects self-funding and cash-generative, and not dependent on external bank funding, and the company cash rich too, it seems anomalous to me to value the shares on a 60 per cent discount to book value when the company is committed to realising value from its assets. Importantly, Dragon-Ukrainian Properties is not a forced seller of any of its assets so can wait to get the best prices.
I am willing to wait, too, for that to happen and I can see the shares being far closer to my fair value target price of 57p by the end of next year. Trading on a bid-offer spread of 33p to 34p, Dragon-Ukrainian Properties' shares rate a buy.
■ Simon Thompson's new book Stock Picking for Profit 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. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
