For instance, last month Conygar completed the sale of 9.6 acres at its 93-acre Haverfordwest site to Sainsbury’s for £9.6m. Following a reworking of the planning application, the project will now incorporate 726 residential properties including affordable housing and a 60,000 sq ft Sainsbury's retail food store with car park and petrol station. Located near the town centre, the site was in the company’s accounts for only £15.4m at the end of March. In addition, Conygar has easily covered the £7.8m cost for investment in infrastructure and services through the net proceeds generated from the land deal with Sainsbury's. This significantly de-risks the residential development. It also means that the plots are in the books for £12,000 each, a massive discount to their open market value. To put this into some perspective, the listed housebuilders have an average plot value of around £36,000 in the Welsh regions.
Or put it another way, if the plots at Haverfordwest were marked to market value, I believe this could boost the company’s net asset value by as much as £15m, or 17p a share. Conygar’s last reported book value was just shy of 181p, up from 174.6p last September, so the hidden value in Haverford West is clearly significant.
Furthermore, I would expect the site to be sold to a major housebuilder in due course as Conygar doesn’t have an in-house residential development team to manage such a huge project. I envisage the first land sales to be made early next year once all the infrastructure is in place. The key players in the region are Barratt Developments (BDEV), Taylor Wimpey (TW.) and Persimmon (PSN).
There is development upside in Conygar's other five Welsh development projects, too, which are in the books at £16.3m. The largest is the Holyhead waterfront development in Anglesey, Wales, which has a carrying value of £9.65m. That looks too low considering that Isle of Anglesey County Council has awarded planning permission to Conygar's joint venture with Stena Line Ports Limited for its mixed-use marina development covering half a mile of waterfront. The scheme will incorporate 326 apartments and townhouses, a 500-berth marina, 50,000 sq ft of marine-related retail, leisure, restaurants, hotel and office space in a prime location overlooking the marina. Other potentially profitable waterfront developments are at Pembroke Dock and Fishguard.
Funded for growth
Importantly, with £63.9m of cash on its balance sheet at the end of March 2014, and substantial credit lines in place too, the company is very well funded to bring on all these developments. The loan-to-value ratio is modest at 20 per cent on the company’s £161m investment portfolio of high-yielding regional assets. Gearing is also 20 per cent of shareholders funds of £61m.
Funding lines include a smart-looking fundraise earlier this year when Conygar issued £30m of zero dividend preference (ZDP) shares on a gross redemption yield of only 5.5 per cent for redemption in 2019. This means that as long as Conygar can generate a rate on return on invested capital in excess of the coupon rate - a total return of 30 per cent over the next five years - then this will create value for shareholders.
Conygar has also negotiated a new four-year £37.2m loan facility with the Royal Bank of Scotland secured on 20 of its investment properties. The loan has a total annual interest cost of 4.3 per cent, including a margin of 3 per cent, and is structured as a £27.2m term loan with a £10m revolving facility to offer flexibility for the future. As a result of these new funding lines, Conygar's total bank debt of £66.1m has an attractive weighted average cost of 4.8 per cent. It also means that the company has firepower in excess of £100m to target new acquisitions while comfortably funding the development pipeline. Analysts at Liberum believe Conygar could even have as much as £120m at its disposal.
Conservative valuations
It’s not just the development portfolio that is conservatively valued. In the six months to end March 2014, Conygar sold properties in Leeds and Worcester for a total of £9.5m, or £600,000 above their carrying value in the accounts. Post the period end, Conygar has sold off two sites at Aker Village, Aberdeen for £15.45m, or almost £1.24m above their last reported valuation. An investment property in Fleet, Hampshire realised £750,000, or £60,000 above book value in recent months too. These three disposals add a further 1.4p a share to the company’s last reported net asset value of 181p.
In fact, after adjusting for gains on disposals from the development pipeline, and yield compression on the company’s £161m investment portfolio, analysts predict a September 2014 financial year-end net asset value per share of 190p, rising to 209p by September 2015. Factor in the bumper gains set to be realised from land sales at the Welsh development projects and Liberum’s forecast of a book value per share of 243p in a couple of years time looks realistic to me.
Furthermore, the great thing about Conygar is that we are getting a free ride on the development properties given the substantial asset backing. At the end of March the investment properties had a contracted rent roll of £13.3m. Adjust for the sale of the Aberdeen and Fleet properties, and the book value is now closer to £145m and the rent roll is around £12m. This easily covers estimated annual net interest payments of £3m which Liberum forecast for both this year and next.
That not only leaves extra cash for investment in the development pipeline and more opportunistic deals, but also for shareholder returns through higher dividends and share buybacks. The payout was raised by a fifth to 1.5p a share last year during which time the board also used excess funds to buy back 4.3 per cent of the issued share capital at below 100p a share. Liberum predict the payout will be raised to 1.8p a share this year, and to 2p next fiscal year.
Provincial property play
It's worth pointing out that Conygar offers a smart option on the recovery in the provincial property market and one which is clearly now coming through. Hence the 3.3 per cent like-for-like increase in the value of the company’s investment portfolio in the latest half year. This valuation uplift reflected a 33 basis point compression in the equivalent yield on the company’s investment portfolio from 8.99 per cent to 8.66 per cent.
Liberum currently expects a further 27 basis point compression in yields in the second half of the financial year. By September 2016 the broking house predicts an equivalent yield of 7.75 per cent on the portfolio to reflect both the improving UK economy and scope for rental growth. In turn, this will help drive net asset value per share towards the 243p house estimate by September 2016 since each 0.5 percentage contraction in equivalent yield produces a valuation uplift of over 6 per cent.
That seems a sensible prediction to make considering Conygar owns a mix of business parks, office, industrial and retail properties located in a variety of locations, including Birmingham, Wolverhampton, Dundee, Lincoln, Northampton and Stafford. True, the average unexpired lease on these properties is only 4.1 years and the vacancy rate is 17.8 per cent. But credit quality is not an issue with between 95 to 97 per cent of rents collected within 10 days of the quarter-end, and any new rentals on void space can only enhance the value of the properties irrespective of any improvement in yields.
Target price
The combination of a regional property recovery, obvious development upside, firepower for value enhancing opportunistic property deals and a conservative accounting policy means that Conygar's valuation is compelling.
In the circumstances, it’s hardly surprising the shares are up a third since I initiated coverage ('Shrewd insider buying at property play', 30 September 2013) and I have no hesitation repeating my earlier buy recommendation. In fact, having reassessed the potential upside, and taken into consideration the spate of recent property deals, I am upgrading my year-end fair value target price to 200p. Trading on a bid-offer spread of 175p to 176p, the 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'
