In conjunction with a club of investors, the company has acquired a new shopping centre in Świnoujście, northern Poland, at a total cost of €24.1m (£19m). The property has an annual net operating income of €1.89m, equating to a net yield of 7.85 per cent, and an average weighted unexpired lease term of 4.5 years.
The investment has been part funded by a bank loan of €17.5m and equity of €7.1m, of which First Property invested €2m. The balance of the equity was invested by a family office, a University of Cambridge college, and other clients of First Property. The investment is forecast to earn annual pre-tax profit of €1.25m of which First Property's share will be €353,000 to give a pre-tax rate of return on equity of 17.65 per cent. The company will also earn ongoing annual management fees of €235,000 and an arrangement fee of €235,000.
The latest acquisition follows on from the purchase of a portfolio of nine regional Lidl supermarkets in Romania for €10.5m (£7.8m) in conjunction with a group of investors earlier this year. That investment was part funded by €4m of equity, of which First Property provided €1m, and a €6.5m bridging loan which will be refinanced using an agreed bank loan that has already been documented. So, after factoring in the annual interest cost on the 4.95 per cent loan, First Property's share of the pre-tax profit is about €180,000 on this deal. The company will also earn annual management fees of €125,000.
Following these acquisitions, analyst Chris Thomas at broker Arden Partners now expects First Property to generate revenues of £20m in the financial year to end March 2017, recurring pre-tax profits of £6.9m and EPS of 4.6p. On that basis, the shares are only rated on 10 times earnings estimates and offer a prospective dividend yield of 3.2 per cent based on the payout per share being lifted to 1.53p. That's still attractive especially as there is ample potential for more earnings-accretive acquisitions. In fact, by my reckoning the board still has around £11m free cash on its balance sheet to be used as equity on further deals. We can also expect a very positive year-end trading update for the 2016 financial year just ended in the near future.
So, having first recommended buying First Property's shares at 18.5p in my 2011 Bargain Shares Portfolio, banked cumulative dividends of 5.75p a share in the past five years, and seen the shares pull back from a record high of 56p at the end of last year, I feel that the odds now favour another move to the upside.
Please note that I recommended buying the shares at 39.5p ahead of the interim results that were released at the end of November ('In pole position for a re-rating', 7 October 2015), and subsequently advised running profits at 53p after my target price of 49p was obliterated ('Four small cap plays', 11 January 2016).
Trading on less than 1.2 times adjusted book value of 40p, rated on 10 times earnings estimates and offering a dividend yield in excess of 3 per cent, I now rate First Property's shares a trading buy with a target price of 56p. Buy.
I have published four columns today and 30 in the past three weeks, all of which are listed below.
