The key take for me in yesterday’s trading update were the comments from Ben Habib, chief executive of First Property, who noted that “"the markets in which we operate are generally buoyant and offer interesting investment opportunities which we hope to capitalise on". He adds that having made substantial acquisitions in the previous year “these investments have all yielded income at or above our expectations at the time of their purchase and are, without exception, valued at levels exceeding their acquisition prices”. Reflecting these acquisitions, the company ended the financial year to March 2016 with assets under management of £352m, up from £327m at the same stage a year ago, but £156m of these assets were directly owned property, up from £83m at the time of the interim results in November.
The point being that the recurring profit earned from the debt funded earnings accretive Eastern European commercial property acquisitions, details of which I outlined in my earlier articles, cover forecasts from analyst Chris Thomas at broker Arden Partners who 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 rated on 11 times earnings estimates and offer a prospective dividend yield of 3 per cent based on the payout per share being lifted to 1.53p. The figures for the financial year just ended point to pre-tax profits of £7.4m, EPS of 5p and a dividend of 1.48p, but this includes some mandates that have now ended and one-off credits too, so I would prefer to use the lower recurring profit figures for the new financial year when making a valuation.
I would also point out that the company had an adjusted net asset value per share of 40.3p at the end of September 2015, up from 35.75p at the end of March 2015, so headline full-year book value per share will show a significant year-on-year increase when the forthcoming results are published in June. There is likely to be a currency benefit on translation of these overseas assets into sterling too. That’s because the sterling/euro exchange rate has weakened by 7.5 per cent from £1:€1.357 to £1:€1.256 since the end of September 2015 during which time the Polish Zloty/Euro exchange rate has been relatively stable at around PLN 4.1-4.3, as it has been for several years.
It’s also worth flagging up that First Property’s board still has £11m free cash on its balance sheet to be used as equity on further debt funded earnings enhancing property purchases, so there could be upside to Arden’s estimates as the current year progresses.
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, I feel that the odds continue to favour a move to the upside to my raised target price of 56p. Trading on only 1.25 times historic book value, I rate First Property’s shares a buy on a bid-offer spread of 49p to 50p. Buy.
