This is despite the fact that Ben Habib, chief executive of First Property, noted at the time that “the markets in which we operate are generally buoyant and offer interesting investment opportunities which we hope to capitalise on". Moreover, having made a number of earnings accretive acquisitions during the financial year to end March 2016, all of which “have yielded income at or above our expectations at the time of their purchase and are, without exception, valued at levels exceeding their acquisition prices,” the company now has a high recurring revenue stream that fully underpins analysts’ earnings expectations for the year ahead. Chris Thomas at broker Arden Partners 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 less than 9 times earnings estimates and offer a prospective dividend yield of 3.8 per cent based on the payout per share being lifted to 1.53p.
And there is no doubt the forthcoming results will make good reading. The company’s adjusted net asset value per share was 40.3p at the end of September 2015, up from 35.75p at the end of March 2015, and there is a decent prospect of another valuation uplift in the second half to end March 2016. There will also be a favourable currency benefit on translation of the value of its overseas property holdings into sterling given that the sterling/euro exchange rate has weakened from £1:€1.357 to £1:€1.262 between the end of September 2015 and the March 2016 financial year-end during which time the Polish Zloty/Euro exchange rate has been stable at around PLN 4.1-4.3, as it has been for several years. The headline profit numbers will be impressive as analysts predict First Property will report pre-tax profits of £7.4m in the 12 months to end March 2016 to produce EPS of 5p and a dividend of 1.48p. Admittedly, this includes some mandates that have now ended as expected and one-off credits too, which is why I am using the lower recurring profit figures for the current financial year when making a valuation.
And it’s not as if the company doesn’t have the firepower to pull off more debt funded earnings enhancing property purchases. By my reckoning First Property’s board still has £11m free cash on its balance sheet, so there could be upside to Arden’s estimates as the current year progresses.
Furthermore, it’s in a good position to win new mandates given its impressive track record: the investment performance of its funds under management in Poland and in Central Europe hold top spot against MSCI's Investment Property Databank (IPD) Central & Eastern Europe (CEE) Benchmark in the decade to 31 December 2015. MSCI's IPD CEE Benchmark comprised a total value of €8.12bn (£6.4bn) in 372 property assets invested by 19 fund managers across Poland, Czech Republic, Slovakia, Hungary, Romania and Bulgaria.
The bottom line is that I believe that investors are being overly cautious in their valuation and assessment of First Property’s future prospects. Offering 40 per cent share price upside to my target price of 56p, I would be a buyer of the shares ahead of the forthcoming results. Please note that I first recommended buying First Property's shares at 18.5p in my 2011 Bargain Shares Portfolio, since when the company has paid out cumulative dividends of 5.75p a share. I last rated the shares a buy at the time of the pre-close trading update (‘New highs beckon’, 19 April 2016).
Trading inline with historic book value, and offering a near 10 per cent and solid earnings yield, I have no hesitation maintaining a buy recommendation on First Property’s shares on a bid offer spread of 39.5p to 40p. Buy.
