The company also owns a 41.5 per cent stake in South African coal miner Bisichi Mining (BISI: 69p) which is consolidated into its accounts and clouds the picture somewhat. It has to do this because FRS 10 accounting standards makes it clear that possible voting control is of more significance than actual management control. For this reason the directors of London & Associated decided that it is a requirement to consolidate Bisichi’s accounts. While, in theory, they could achieve control, in practice they do not get involved in the day to day operations of Bisichi. So although they present consolidated accounts to shareholders using the published accounts of Bisichi, it is important to note that any figures, risks and assumptions attributable to that company are the responsibility of the Bisichi board of directors who are independent from the board of London & Associated.
However, if you are willing to crunch the numbers then it’s easy enough to work out what London & Associated’s own property investments are worth. And that’s exactly what I have done in order to ascertain the true value in the shares.
Unravelling the value in the shares
Bearing this in mind, at the end of June 2015 the reported market value of the group’s property was £103.7m of which £92.1m was attributed to London & Associated and £11.6m to Bisichi. The group also owned £4.8m of head leases, all bar £200,000 of which is owned by London & Associated. In addition, £2.9m of investments worth £3.5m in joint ventures were owned by London & Associated outright.
In terms of borrowings, London & Associated has a five-year £45m non-recourse loan from Santander, as senior lender, supported by Europa Capital Mezzanine Limited, as mezzanine lender. These facilities expire in July 2019 and the senior loan facility is fully hedged to give a blended interest rate of 4.79 per cent for the £45m debt. In addition, London & Associated has two debentures; one of £10m expires in August 2022 and carries an annual interest rate of 8.1 per cent, and another of £5m has staged repayments to August 2018, of which £3.75m is currently outstanding. The interest charge on this is 11.6 per cent. All debentures are secured on core property and are covenant compliant.
I calculate that at the end of June 2015 London & Associated had net debt of £55.8m and a loan-to-value ratio below 60 per cent on properties and head leases worth £96.7m. Please note that I have stripped out the Bisichi assets and liabilities to arrive at these numbers in order to get a clear picture of London & Associated’s own finances.
That’s well worth doing because it may not have been widely reported, but Schroders Columbus Fund and London & Associated sold The Langney Centre in Eastbourne to Tyburn Lane Private Equity and Vale Retail for £19m last week. The 130,000 sq ft shopping centre is anchored by Tesco with Boots, Peacocks and Barclays, and has a total of 31 retail units, a car park providing 820 spaces, a petrol station and six residential flats. The joint venture acquired the centre for around £16m in 2011 and at the time London & Associated invested £889,000 for 12.5 per cent of the equity and its associated company Bisichi Mining acquired 12.5 per cent too. The point being that the 25 per cent combined interest in Langney was in London & Associated Properties books for £2.75m at the end of June 2015, so the sale will have produced a positive return for all parties concerned given it was at a decent premium to the 2011 purchase price.
I would also point out that the company has been successful on lettings at its wholly owned centres. For instance, its largest directly owned asset, Orchard Square in Sheffield, is in effect fully let, having secured four major lettings worth £430,000 of rental income in the first nine months of 2015 including a 15-year lease to Virgin Money at £285,000 a year. The same is true of Brixton Village in south west London where there is a long list of retailers waiting for a unit to become available. And even the Kings Square shopping centre in West Bromwich which has endured its fair share of challenges is now bagging a number of new lettings and lease renewals, including a lease extension for anchor tenant Iceland, the frozen foods retailer.
The bottom line
The bottom line is that I feel that the momentum shown in these property assets should be strong enough to justify revaluation gains when London & Associated publishes its 2015 financial results in a few weeks time. And with the shares trading so far below net asset value of 49.5p, that’s simply not in the price.
Of course, associate company Bisichi has faced its own share of challenges too given the sharp falls in the global coal price, and only part of this will have been offset by the steady devaluation of the South African rand. That said, I am far less interested in Bisichi as London & Associated’s stake in the company has a market value of £3m, a tiny amount in comparison with the value London & Associated has tied up in its own property assets.
So having first recommended buying at 44p (‘Undervalued and under researched’, 17 Feb 2014), after which the price hit a high of 61p, and last reiterated that advice at 38.5p (‘Catalysts for share price moves', 4 Jun 2015), I feel that the current valuation is wholly unwarranted. From a technical perspective we could be due a rally too because the share price is now back at support levels dating back to the summer of 2012, and from which it rallied strongly.
On a bid-offer spread of 21p to 22.5p, valuing London & Associated’s equity at only £19m or £23m less than last reported net asset value, I rate the shares a buy ahead of the forthcoming full-year results. Income seekers should note that a payout of 0.156p a share implies a dividend yield of 0.7 per cent. Buy.
