A good example is Aim-traded Burford Capital (BUR:715p), a provider of investment capital and professional services for litigation cases, whose share price has surged by a further 17 per cent since I advised running profits ('Investment company watch', 5 Jan 2017), and is up 389 per cent since I first recommended buying at 146p only 21 months ago ('Legal eagles', 8 Jun 2015). A weighty tome from the equity research team at broker Liberum Capital, who initiated coverage with a buy recommendation at 631p, highlighting a target price of 748p, is one reason for the latest price rise.
Another explanation is that investors have cottoned onto what could be a chunky windfall for the company after it sold off several million dollars of participation interest in its investment relating to the 2012 expropriation by Argentina of a majority interest in YPF, the New York Stock Exchange-listed energy company formerly owned by Repsol, the Spanish energy major. I was alerted to the potential value in this legal case by analyst Trevor Griffiths at broker N+1 Singer three months ago ('Targeting record highs', 21 Nov 2016).
The key points to note are that at the time of the expropriation Repsol owned more than 50 per cent of YPF, and the Petersen Group, another Spanish company, owned 25 per cent of YPF. After suing, Repsol settled its claims and received a payment of approximately $5bn (£4bn) from Argentina and YPF. Burford was then appointed to provide financing to the liquidators of the Petersen Group, which went bankrupt after the expropriation, who are proceeding with claims worth $3bn against both YPF and Argentina.
Burford is entitled to 70 per cent (less expenses to take its recovery levels below 60 per cent) in the YPF-related claim, and has so far invested $17.5m (£14m) of capital, but the pricing of its sales of participation interest implies a value of more than 10 times this investment. Analyst Trevor Griffiths at broker N+1 Singer estimates that the uplift is worth just over 55p a share and notes that the unrealised profit of $157.5m (£129m), if confirmed, compares with implied second half of 2016 consensus revenue and operating profit expectations of $48m and $35m, respectively. This suggests material increases to 2016 revenue, profit, EPS and book value per share estimates when Burford reports its full-year results on Tuesday 14 March 2017.
The team at Liberum have been crunching the numbers too and are pencilling in a 50 per cent rise in EPS to just shy of 50 cents a share in 2016, having factored in $40.5m (£49.6m) of litigation investment income from the Peterson case. At spot exchange rates this suggests Burford's shares are priced on a PE ratio of 18, a valuation that's far punchier than it was when I initiated coverage but one that could still afford further multiple expansion in the current bullish equity market climate. Run profits.
Conygar cashed up for developments
Shares in Aim-traded property vulture fund Conygar (CIC:176p) are finally making the progress I had envisaged when I recommended buying at 140p last summer and have closed in on my 180p target price ('Insiders buying on solid foundations', 11 Aug 2016). I first recommended buying at 131p ('Shrewd insider buying at property play', 30 Sep 2013) and a return to the subsequent seven-year high of 195p dating back to March 2015 is still a possibility.
The small-cap company is run by chief executive Robert Ware, a property stalwart with 29 years main board experience behind him, including executive roles with real estate giants Development Securities and MEPC. His deal-making ability has been shining through in recent weeks as Conygar has pulled off several property deals.
Firstly, the company has just announced the sale of its investment portfolio for £129.8m, a modest premium to the carrying value at the end of September 2016, to Regional REIT (RGL:105.5p). The acquirer owns a £500m portfolio of UK commercial property, predominantly office and industrial units in regional centres outside the M25 motorway, yielding around 7.1 per cent. Regional REIT is targeting a 10-15 per cent annual net asset value return and is managed by London & Scottish Investments and the well regarded Toscafund Asset Management. The addition of Conygar's high-yielding portfolio looks a good fit to me.
The consideration for the purchase is being satisfied by the issue of £28m of new shares in Regional REIT, the transfer of Conygar's zero dividend preference shares which mature in January 2009 and have a value of £35.7m, and the transfer of all the £69.5m of senior bank debt secured on the assets. Conygar had cash balances of £66m on its balance sheet at the end of September, and that sum has been bolstered by a bank refinancing since then which released cash, so I reckon that pro-forma net funds post the sale account for just over half net asset value of £152m, or 197p a share. Importantly, the dividend income on the Regional REIT's shares will help fund Conygar's annual running costs.
It also means that the company is heavily cashed up to accelerate its existing development asset portfolio and seek new investments. The board has wasted no time at all as it has just paid £13.5m for a 40-acre site in Nottingham that was formerly the Boots HQ. Located close to the train station, Mr Ware believes the site has potential for a mixture of office, residential and student housing accommodation. The site had a lapsed planning application for a mixed-used scheme and a new application will be submitted.
Development projects with potential
There are bright prospects for the company's other development projects, too, which have a combined book value of £40.7m. These are held at cost in the accounts, so they offer the potential for valuation upside once planning consent is given and disposals are made. For example, Conygar has just secured planning approval for the first phase of its Fishguard Harbour Marina project. Held in joint-venture partnership with Stena Line, the first phase relates to infrastructure works and includes an 8.3-hectare development platform, two breakwaters and 345 floating marina berths. The project is expected to comprise 253 residential apartments, a 450-berth marina and a 19-acre platform for the expansion of the existing port when complete.
The company is also making decent progress on its flagship development at Haverfordwest, Pembrokeshire. The substantial infrastructure works to support the development of 729 residential units and a seven-hectare retail site have been completed on budget at a cost of £3.7m and the company is in advanced negotiations with a major housebuilder for the first phase of the residential development. The 93-acre site is held in Conygar's accounts at £22.2m, so 'oven-ready' residential land is effectively in the books for £30,500 per plot, significantly less than the £40,000-plus value that analysts believe should be achievable when sold.
Also, Conygar is awaiting the outcome of two planning applications for the development of a seven-hectare retail site at Haverfordwest, which it bought back from Sainsburys for a knock-down price of £3m, having originally sold the site to the supermarket chain for £13.75m in 2014 when it had planning permission for a 95,000 sq ft retail superstore and associated petrol station. Conygar's new planning applications propose a retail-led mixed-use development (including 10 retail units and a 60-bed hotel) and a cinema and restaurant development (five-screen cinema and five new restaurants). Pembrokeshire County Council is expected to announce the outcome of the application shortly, thus offering potential for further positive newsflow.
A decision is imminent too on a planning application for an 11,000 sq ft Marks and Spencer's Food Hall in Ashby-de-la-Zouch, Derbyshire. Construction will start immediately if approved. There is also an adjoining two-acre plot on the site for development and discussions with potential buyers are ongoing.
So, with the company cashed up to make more opportunistic acquisitions and accelerate its development projects - I reckon net funds account for about 83p a share and the stake in Regional REIT is worth another 36p a share - then I see potential for the share price discount to net asset value of 197p to narrow further. It's also reassuring to know that shareholders sanctioned the renewal of a share buyback programme at last month's annual meeting. Conygar acquired 5.3m shares representing 6.4 per cent of its share capital at an average a price of 167.4p per share last financial year, which enhanced net asset value per share by 2.5p. The company has just purchased 500,000 shares at 171p, and with the shares trading well below book value expect further share price supportive purchases too. Run profits.
Palace Capital's shrewd dealmaking
Shares in Palace Capital (PCA:355p), a property investment company focused on commercial property outside London, came within pennies of the 380p minimum target price at the end of last year when I advised running profits ('On the money', 12 Dec 2016), having initiated coverage on the shares at 335p last autumn ('A royal investment', 17 Oct 2016).
Progress on sales and lettings since that last update suggest that the shares are worth buying again at 355p. That's because the company has just sold off two commercial properties, in Leeds and Warwick, for £3.7m, representing a 25 per cent premium to book value. It's sensible to do so given the tenant on one of the properties, support services group Interserve (IRV:240p), has the option to exercise a break clause this summer, which would have resulted in the loss of £193,000 of annual rent. Also, the other property is vacant, so the sale removed £185,000 of annual running costs. And these are not isolated sales as the company announced yesterday that it has sold off the ICS Buildings in Maldon, Essex, for £3.9m, a price equating to £1.56m above the last independent valuation of the property as at 30 September 2016. These three disposals not only add 9p a share to net asset value, but free up capital for reinvestment and highlight the ability of Palace Capital's management team to enhance value through active capital management of the portfolio.
A good example of this is the conversion of a 10,000 first floor office space at a small shopping centre, Copperfields in Dartford, into 13 self-contained flats at a cost of £2.25m. The work completed in November and the units have now all been leased out to the local council on a 10-year lease at an initial rent of £146,500, rising annually at 2.5 per cent a year, and with no break clauses.
In an investment climate where yield compression looks to have run its course, then active management of portfolios is a great way to keep valuations moving upwards and explains why analysts believe that the company's net asset value will rise to around 429p in the 12 months to the end of May 2017, up from 414p the year before. Also, rental revenue from the portfolio underpins expectations of a 12.5 per cent hike in the full-year payout to 18p a share based on a 12 per cent rise in EPS to 21.3p, so the share price is supported by a decent looking 5 per cent prospective dividend yield.
The company is able to grow both EPS and is not reliant on valuation gains on the portfolio to pay dividends because its average cost of debt on £82m-worth of borrowings secured on its £185m portfolio is only 2.9 per cent a year, significantly below the average investment yield of 7.5 per cent on the properties based on annual contracted rent of £13.7m.
Trading on a 17 per cent discount to net asset value forecasts, the high-yielding shares look an attractive investment proposition for a company whose management team has delivered net asset value per share growth of 92 per cent over the past three years, and is garnering a shrewd reputation for buying off-market and adding value to assets through active property asset management and refurbishments.
I rate Palace Capital's shares a buy at 355p and have upgraded my target price from 380p to 400p. Buy.
MORE FROM SIMON THOMPSON...
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