It's fair to say that the upside I was envisaging has not yet materialised because although shares in Crystal Amber have shot up 50 per cent in the past 18 months, reflecting some very shrewd stock-picking by the company's investment team which warrants running profits there, those of Sutton Harbour have proved a laggard. In fact, Sutton Harbour's shares are slightly under water, albeit they have endured a turbulent passage since I initiated coverage. That said, I have kept faith and have updated the investment case a number of times as I felt that the ongoing undervaluation of the company represented a decent medium-term buying opportunity.
At the end of last year, I recommended buying the shares when the offer price was 28p ('Small cap plays', 5 December 2013), and subsequently reiterated the advice when the offer price was 30p ('Set sail for gains', 10 April 2014). The company's results a few weeks ago vindicate this stance and in my view there is a realistic chance of a return to the December 2012 highs around 36p. Beyond that the summer highs of 40p in 2011 are the next target.
In the latest 12-month trading period, Sutton Harbour returned to profit, posting underlying pre-tax profits of £308,000 on revenues of £7m. On a segmental basis, both the marine and real estate businesses contributed gross profits of around £1m each, the car parking operation around £250,000 and the regeneration division made £169,000. From these contributions deduct central overheads of £1.3m and £860,000 of finance costs. Interest cover of 1.6 times underlying operating profit may look a tad tight, but net debt of £20.2m looks comfortable, representing just over half net assets of £38.5m.
True, borrowings are up from £17.4m in March 2013, but this mainly reflected £2.4m of construction costs on King Point Marina, which is now complete (see below). In any case, the company is trading well within its credit facilities having renegotiated a new £22m banking facility which expires in June 2016.
Set fair for asset valuation gains
The return to profit aside, the company reported good news on the value of its portfolio which increased in value by £1.5m to £38.5m in the year to March 2014. This resulted in net asset value per share growing from 38p to 40p. There should be scope for further valuation uplifts, too. That's because the initial net yield applied in the latest valuation by Jones Lang La Salle surveyors on Sutton Harbour's investment property portfolio contracted from 9.12 per cent to 8.90 per cent. Moreover, any further improvement in investor demand for commercial property in the regions will feed through to a further contraction in the yield used to value the company's properties.
That seems a realistic scenario since investor appetite for regional property continues to improve. This is one reason why I remain favourable on prospects for Aim-traded property investor and developer Conygar (CIC: 167p), a company of which I appraised the investment case last month ('Property play with hidden value', 16 June 2014). Interestingly, Conygar has just bought back £5.2m of its equity at a discount to book value, a transaction that is likely to prove a shrewd purchase given the likely valuation uplifts on its Welsh property developments. I can only reiterate my buy advice on that company.
Furthermore, I would expect some valuation uplifts for Sutton Harbour even without factoring in further yield compression. That's because its 171-berth King Point Marina, in the Millbay regeneration area of Plymouth, is only being valued at cost (around £4m) in Sutton Harbour's latest set of accounts ending 31 March 2014. The new season commenced on 1 April and the marina is now open for business with just over half of the 81 pontoons occupied. There is potential for revenues to increase sharply since the marina has capacity for 171 vessels. Berthing is available for vessels ranging from seven and a half to 25 metres in length with annual fees varying from £350 to £400 per metre.
Property values could also get a lift from additional lettings of space on Sutton Harbour's 70 properties. Currently, the estate is 86.4 per cent let, up from 85.2 per cent in March 2013, with the estimated rental value on vacant units around £250,000. The average lease length is just shy of 10 years and contracted rent is £1.23m on an investment portfolio valued at £15.6m. The owner occupied portfolio is worth £22.9m, up from £21.7m in March 2013.
It's also worth flagging up that the former Plymouth airport site in Derriford is in Sutton Harbour's books at £11.5m. The leasehold agreement entitles the company to a 25 per cent share of sale proceeds in the event the 113-acre site is sold. Plymouth City Airport Limited, a wholly owned subsidiary of Sutton Harbour, ceased airport operations two and a half years ago and is working with Plymouth City Council to achieve best value from alternative use of the site. Net proceeds will be split 75:25 in favour of PCC which is also the freeholder of the site.
The council wants to create a sustainable mixed-use urban centre at the heart of the north of Plymouth. Bearing this in mind, Sutton Harbour's plans encompass a business park, education facilities, new district centre, commercial and retail units, hotel and housing. Clearly, this is going to take time to pan out, but there is obvious potential for a substantial windfall for Sutton Harbour in the event that the site is developed.
In the short term, investors will be more focused on how the improving regional property market and the ongoing UK economic recovery is benefiting Sutton Harbour. On both counts the risk looks skewed to the upside. In the circumstances, I continue to rate the shares a medium-term value buy on a 25 per cent discount to book value.
■ 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'
