The company’s key developments encompass a residential pipeline of 25,000 homes including a 1,432 acre freehold site Alconbury Weald, incorporating Cambridgeshire's Enterprise Zone with permission for 5,000 homes; Waterbeach, a 700 acre site north-east of Cambridge where Urban & Civic has been selected by the Defence Infrastructure Organisation to develop 6,500 homes; Rugby, a 1,170 acre development in partnership with Aviva Investors where permission has been granted for 6,200 new homes; and a 2,600 plot site in Newark-upon-Trent in Nottinghamshire where Urban&Civic has an 82 per cent interest, having acquired the previous owner, Warwickshire-based property group Catesby for £34m in February this year. Catesby also owns another 20 sites in the Home Counties and Midlands.
Solid development progress
To give you some idea of the progress Urban&Civic has been making since the Catesby acquisition completed, funded by £22m in cash and £12m in shares, I understand that the cash consideration is likely to be fully repaid by the end of this year. Moreover, the underlying pre-tax profits Catesby will report for the 12 months to end December 2015 will at least match the £7m profit reported last year. Its pipeline remains robust. It’s worth noting that the 2,600 unserviced plots in Newark have a net carrying value of just £8,300 each in Urban&Civic’s last set of accounts. Local new house sales are priced around £175 to £180 per sq ft, so there is scope for a significant uplift on the book value of this land when it is sold on or developed once the physical site infrastructure is in place.
It’s a similar story at Alconbury, near Huntingdon in Cambridgeshire, which has a planning consent for 5,000 houses and 3.1m sq. ft. of commercial space with a gross development value in excess of £1.3bn. Hopkins Homes is developing the first phase of the residential element and construction will commence next month with first occupations expected next summer. Bearing this in mind, the plots being developed have a carrying value of £16,170 each in Urban&Civic’s last balance sheet, a modest sum considering that “the arrangements in place are expected to realise more than twice that amount back to the group in the first instance.”
And notable progress is being made at the group’s development in Rugby which has outline planning permission for 6,200 houses and 1.3m sq. ft. of commercial development, with a gross development value in excess of £1.4bn. Construction work on the onsite infrastructure starts later this month and housing starts are likely to begin in the first quarter of 2016. The unserviced plots have a carrying value of £12,125 in the group’s accounts, so we can realistically expect material upside here too.
Moreover, with net funds of £96m on its balance sheet, accounting for 27 per cent of shareholders funds of £348m, the group is well funded to be able to develop these sites and crystallise the full value of the property assets for its shareholders. Property is in the books for £232m of which Alconbury accounts for £129m and the 50 per cent share in the Rugby site has been valued at £15.8m.
Investment properties with potential
The development portfolio aside, Urban&Civic also has a book of income producing investment properties which it has been developing. There is significant potential upside here too, and we will not have long to wait either for it to be realised.
That’s because a number of these developments are coming to fruition including a Sainsbury’s store in Herne Bay, Kent which has been pre-let to Sainsbury’s on a 25-year lease at a passing rent of £2.2m. Completion is scheduled for March 2016. Around the same time, the redevelopment of the group’s Feethams Leisure centre in Darlington completes. This has a gross development value of £23.1m based on a yield on cost of 8 per cent.
Urban&Civic is also developing a valuable waterside development of 59 one and two bedroom flats and penthouses at Bridge Quay, Bristol. The first phase of 40 units was released earlier this year and was reserved in a single weekend. The final phase is currently on sale with the largest penthouses being marketed at around £600 per sq ft, so the forecast surplus of £2.7m over March 2015 net asset value should be easily exceeded from this development.
There should also be valuation upside on the 75,000 sq ft Gallaher Retail Park, situated between Bradford and Leeds, and which was acquired by Urban&Civic for £11.5m six months ago. Rental income is set to rise from £990,000 to £1.1m by September 2016 following a fixed rental uplift and there is potential to raise rents further to £1.15m with the addition of two-drive through units and rearrangement of the existing space. The eight acre site also encompasses 840 car parking spaces.
Fair valuation
So with a number of Urban&Civic’s commercial property developments set to complete within the next six months, and work on the residential sites on track, I feel that the forthcoming set of full-year results will be full of positive newsflow to support a decent uplift to Urban&Civic’s last reported EPRA net asset value of 259p a share (at the end of March 2015).
Given the likely increase in its land holdings in the current buoyant housing market, I feel analyst forecasts of a 280p a share year-end net asset value at September 2015, up from 249p a share in September 2014, could be far too conservative given the marked yield compression we have seen in the commercial property sector this year and strong residential house price growth since the group’s March half-year end.
Trading on a bid-offer spread of 270p to 274p, I rate Urban&Civic’s shares a buy ahead of the forthcoming fiscal 2015 results and have a six-month target price of 325p as I feel that the shares should be rated on a premium to what clearly is a conservative carrying value of the group's property assets.
Please note that I commented on this company in May last year after the reverse takeover of Terrace Hill, a constituent of my 2013 Bargain share portfolio (‘A transformational deal’, 1 May 2014).
I have written two articles today and nine in total this week, all of which are included in the list of my articles below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past three weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Avation: Buy at 148p, target 200p ('Flying higher', 14 October 2015)
■ Cohort: Run profits at 400p ('Cohort on a roll', 14 October 2015)
■ Vertu Motors: Buy at 68p, target 80p to 85p ('The virtue of Vertu', 15 October 2015)
■ Urban&Civic: Buy at 274p, target 325p ('Plotting a break-out', 15 October 2015)
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
