Shares in Wichford, which is currently in the process of raising £52.2m through a deep discounted 7-for-one rights issue at 6p, have taken off since I advised buying them at 23p before they went ex-rights (, 17 August 2009). Adjusted for the rights issue entitlement, that gives an entry point of 8.1p a share, although by the time the article was published online, the 500 or so IC Advantage subscribers who took up my advice were buying between 25p and 33p so had a higher net entry point of between 8.375p to 9.375p a share. Either way, we have all made good gains with the shares now trading at 12p, a 48 per cent rise on the recommended buy-in price and a 43 per cent rise for those lucky online readers who had access to the article four days before the magazine went on sale.
If you followed the advice I would run your gains as there is clear momentum in the sector and specifically for property companies with portfolios underpinned by high quality covenants on long leases.
It was a similar story ten days or so ago, when my share tip on CLS went live on the website (, 3 September 2009). The combination of a portfolio packed with decent yielding long lease government property and a share price trading 35 per cent below brokers' end 2009 net asset value estimates of 689p a share, has whet investors' appetite - with the shares rising smartly from 450p to 500p. The valuation gap is still far too wide and the shares continue to rate a sound medium term buy.
Moscow Stations
Last week, results from an old favourite, , a specialist in industrial property in Moscow and St Petersburg, caught the eye. So much so that I had no hesitation to upgrade the share recommendation to buy in last Friday'ss magazine. It's a company that I have followed for some time having successfully advised an arbitrage play on the company's takeover of Raven Mount (, 9 April 2009). That reaped a 33 per cent profit in only six weeks, although again only online subscribers were able to get in early at the advised buy in price. For most readers the gain would have been nearer 15 per cent, albeit that's still not a bad return.
I think this company warrants further coverage as there is a very interesting story to tell and a potentially profitable one, too. What caught my eye, and also that of the real estate team at Bank of America Merrill Lynch whose research note landed on my desk, is that the company now has an incoming producing portfolio of 519,000 sq metres of let space at 10 locations in Moscow, St Petersburg, Rostov and Novosibirsk. That includes 129,000 sq metres of space that has been let since the end of last year, but excludes a further 83000 sq metres of property on which Raven Russia has letters of intent and pre-let agreements in place. In total the portfolio is currently producing $70m (£42m) of annualised income to both Russian and multinational companies – including food retail Auchan - and generates a very attractive ungeared yield of 13.6 per cent. The average unexpired lease term is 6.7 years and the average annual rent is $120 per sq metres which equates to a modest £6.40 per sq ft.
However, it is the scope to ramp up the rent roll that is Raven Russia's main attraction. At present the total completed portfolio is 973,000 sq metres, so only 62 per cent of this is currently let. In addition, there is a further 100,000 sq metres that is under construction of which 47,000 sq metres will be delivered in the next month; a 18,000 sq metre building in Istra, Moscow will complete at the end of 2010 and it has already been pre-let for ten years at a rent of €105 per sq metre so this will bring in a further $2.8m in rent; and finally there is a 35,000 sq metre building in St Petersburg that is 85 per cent complete and could be ready for occupation within three months, although completion has been deferred until the letting market improves. In other words, Raven Russia has a portfolio of almost 1.1m sq metres of which around 602,000 sq metres is let, or will shortly be income producing. Virtually all of its leases are pegged to the US dollar and are rents are upwards only.
Analysts at Bank of America Merrill Lynch believe that the net operating income from the portfolio will rise to $93m by the end of next year as recently completed space is leased out. They have factored in a six-month time lag between completion of projects and the space being let and a 40-60 per cent initial vacancy rate on new completions, but expect this to fall sharply to 7 per cent vacancy rate by 2011 and longer-term a 95 per cent occupancy rate. I think these assumptions are sensible for several reasons.
Russia's lettings market
Excluding Raven Russia's land bank of 432 hectares, chartered surveyors Jones Lang LaSalle has valued the company's portfolio at $890m, or $800 per sq metre, at the end of June based on a 12 per cent yield. Around half of this valuation has been done on a 'fair value' basis for completed and let projects and the balance is held at cost for projects under development and those held for future development. This is likely to prove conservative as Raven Russia notes that "we believe this valuation is below the current replacement cost including the cost of land and finance." The reason why Jones Lang LaSalle has erred on the side of caution is because there have been virtually no transactions in the Russian investment market since the start of this year and currently it is difficult to obtain debt on properties in the region.
However, the lack of finance for new projects will work in Raven Russia's favour as it reduces the supply of new industrial space coming onto the market and will also help to underpin rents. In fact, the company notes: "We could see a potential lack of supply in 12-18 months pushing rents back up." Since tenants have been taking on shorter leases this will in turn offer scope for Raven Russia to increase its rent roll on renewals and raise market rents on existing unlet space. The board believes that if lettings continue as planned then portfolio will eventually produce a net operating income of $128m and will offer an unleveraged return of 12 per cent.
Funding
Raven Russia has an advantage over its rivals in that its funding is pretty secure. The company had $182m of cash on its balance sheet at the end of June and its borrowings included $117m due within 12 months, $67m due within two years, $244m due between two and four years, and $35m due for repayment after five years. That gives total principal debt outstanding of $463m at a weighted average cost of 8.3 per cent and a maturity of 3.3 years. Short-term repayments of $20m are due later this month and a further $40m in September 2010 on a development in Rostav, although a $30m refinancing on that project should be complete later this month.
In addition, Raven Russia has agreed a two-year rollover of its construction facility for of its Noginsk project in Moscow - consisting of 120,000 sq metre of warehouse space - into a two-year $61m facility; a $30m increase on the facility of the Istra project on a new four year term; and a eight-year $20m facility on its Novosibirsk 120,000 sq metres project. So in total the new facilities total $151m leaving a manageable $70m of short-term repayments due within 12 months.
Gearing levels look comfortable, too, with net debt (including outstanding preference shares) currently a modest 48 per cent of shareholders equity. It's reassuring to know that loans are on a non-recourse basis and are secured on individual assets so this protects the group from default on any given secured loan.
Valuation
With funding secure and rivals being held out of the new build market due to difficulties raising development finance, Raven Russia is well positioned to continue to roll out and let out its projects, albeit against a relatively weak lettings market. This will further underpin the conservative valuation placed on its property and gives scope for an uplift in the company's net asset value as developments are let.
So although Raven Russia's net asset value (NAV) is forecast to fall from 143 cents at the end of 2008 to 111 cents by the end of December, analysts at Bank of America Merrill Lynch expect this to recover to 115 cents in 2010 and 138 cents in 2011. Based on an exchange rate of £1:US$1.66, that equates to a year-end NAV of 67p a share and means the shares - priced at 37.75p on a tight 0.25p bid-offer spread – are trading a hefty 44 per cent below what looks like a bottom of the cycle NAV.
If that's not attractive enough, then consider that Raven Russia is also the only Russian property company paying dividends. The interim payout of 0.5p a share is payable on 23 October (ex-dividend date of 23 Sep) and once the portfolio is fully let it is the board's intention to raise dividends significantly. Even if the final payout only matches the interim then the prospective dividend yield is still around 2.6 per cent. The investment case is also strengthened further by a bullish chart as the shares have completed a prolonged bottoming formation which was confirmed when the price surged 27 per cent from 28.5p to 36p on the results on Monday 7 September, having traded no higher than 33p in the past 10 months.
There is likely to be some future technical buying, too, as Raven Russia - which has a market value of £195m - is looking to move to the main list from Aim, so will shortly be on the radar of index tracking small cap fund managers. So offering 55 per cent upside to Bank of America Merrill Lynch's price target and fair value estimate of 59p, I rate the shares a sound medium-term buy.
