Bearing this in mind, in six weeks time Aim-traded property vulture fund Conygar (CIC: 165p) will be reporting its results for the financial year to end September 2014. They are virtually guaranteed to impress. That’s because having booked a first half revaluation gain of £4.8m on its investment portfolio (valued at £161m at the end of March 2014), reported pre-tax profits almost matched those for the whole of fiscal 2013. And with the commercial property market in fine fettle then it’s fair to assume we can expect further valuation uplifts in the full-year figures on the back of yield compression.
Conygar’s portfolio was last valued on an equivalent yield of 8.66 per cent and analysts at broking house Liberum Capital predict a September 2014 financial year-end net asset value per share of 190p, up from 181p at the end of March 2014, largely reflecting to a further 27 basis point compression in that yield. On this basis, the shares are being priced on an attractive 15 per cent discount to book value.
Bumper development gains
But it’s what lies ahead that interests me most. In particular, the potential for Conygar’s net asset value to ramp ahead in the current financial year. Part of this value creation will undoubtedly come from land sales on a development portfolio valued in the accounts at cost of £32.9m.
Specifically, I expect some major land deals at the company’s Haverfordwest site which has planning for 726 residential properties. The plots are in Conygar’s accounts for £12,000 each, a huge discount to their open market value given that the major listed UK housebuilders hold their land banks in Wales at three times that figure. Conygar only paid £14.3m for the site four years ago and has since gained planning consent and offloaded nine of the 93 acres to Sainsbury’s in a land deal that easily covers the £8m cost of putting in the site infrastructure.
Moreover, once this is in place, then I would expect the land to be sold off to major housebuilders with first land deals expected early next year. Bearing this in mind, it’s reasonable to believe the company could achieve double the carrying value of the development in the accounts on any land deal, adding somewhere between 15p to 17p per share to its end September 2014 net asset value. That’s a chunky sum and one that’s not in the price.
Something else not in the price is the potential for realisation from Conygar's five other Welsh development projects. These are in the books at £16.3m of which the Holyhead waterfront development in Anglesey, Wales, is by far the largest investment. The site obtained planning earlier this year for a mixed-use marina development covering half a mile of waterfront and to incorporate 326 flats and townhouses, a 500-berth marina, and 50,000 sq ft of marine-related retail and leisure space. The site is being developed with joint venture partner Stena Line and has a book value in Conygar’s accounts of £9.65m, representing the costs incurred to date.
That modest valuation looks far too low given there is potential to bring forward home sales on the site in anticipation of the housing demand created from the construction of the Wylfa Newydd nuclear power station, 15 miles away on the Isle of Anglesey. The £8bn plant will provide 1,000 permanent workers and upwards of 6,000 during construction which is scheduled to commence in 2019, subject to the submission of an application for development consent order to The Planning Inspectorate.
Management highly incentivised to create value
Also I don’t think that many investors have fully cottoned onto the fact that a management profit share agreement means that Conygar’s main board needs to grow the company’s net asset value per share by 41 per cent to 245p in the three financial years to September 2016 to trigger a payout for themselves. This means there is an even greater incentive for the company to realise gains on development properties and make some shrewd opportunistic purchases to create value. And this is what the senior management team have quietly been doing.
In the second half to end September 2014, Conygar sold off two sites at almost 9 per cent above value. These were Aker Village in Aberdeen for £15.45m and an investment property in Fleet, Hampshire for £750,000. Subsequently the company acquired an industrial park at Colwyn Bay, North Wales for £2.75m at the end of the summer. The park comprises 22 acres and 191,000 square feet of modern industrial space and is located close to the A55 expressway midway between Holyhead and Chester. Around 45,000 sq ft of space is currently let to three tenants paying a rent of £167,000 and Conygar is upgrading and redeveloping the empty 146,000 sq ft. The site has suffered from under investment, hence the attractive purchase price and potential for value creation.
I would expect further deals because with £63.9m of cash on its balance sheet, and credit lines in place, the company is well funded. In fact, with balance sheet gearing of only 20 per cent, I reckon the company has over £100m of capital available to target acquisitions and fund its development pipeline.
The directors certainly have the flexibility to do so because I estimate the annual current rent roll is now around £12.2m on an investment portfolio worth £148m (before the September 2014 revaluation), or the equivalent of four times Conygar’s estimated interest payments in the current financial year. And while they are weaving their magic shareholders can expect a continuation of a very progressive dividend policy.
Potential for bumper shareholder returns
The forecast is for a full-year dividend of 1.8p a share to be declared at the forthcoming results, a 20 per cent increase on fiscal 2013, rising to 2p a share in the current financial year. The board have substantial equity interests in the company so there is an added incentive for them to make these payouts. There is also every incentive for them to lift the book value per share to that 246p hurdle level within the next two years. Yield compression will help as every 0.5 percentage contraction in equivalent yield produces a valuation uplift of over 6 per cent on the investment portfolio. But ultimately it is realising value from the development portfolio which will drive the growth in both Conygar’s net asset value and its share price. That’s exactly what I expect to see happen over the next six months, which explains my positive stance.
So priced 22 per cent below what looks to me like a realistic net asset value estimate of 210p for the 2015 fiscal year, and with positive newsflow expected from Haverfordwest in the coming months, the road ahead looks pretty clear for a share price rerating. On a bid-offer spread of 162p to 165p, and offering 20 per cent upside to my fair value target price of 200p, Conyar shares rate a value buy.
Please note that I initiated coverage on the shares a year ago at 131p ('Shrewd insider buying at property play', 30 September 2013), since when they have risen by 25 per cent during which time the FTSE Aim index has fallen by over 10 per cent. I last reviewed the investment case when the price was 176p post the interim results (‘Property play with hidden value’, 16 June 2014).
Please note that I have written 32 other columns this month including five this week, all of which are available on my IC homepage...
■ Simon Thompson's 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 stockpicking'
