First Property
Last week European property fund manager First Property Group released a bullish pre-close trading update, which revealed that assets under management (AUM) have risen by 20 per cent to £365m in the 12 months to 31 March 2011.
It's worth noting that the company has significant exposure to Polish property, so, although sterling's weakness is rather bad news for UK holidaymakers in Europe, it is very good news for First Property. In fact, around 75 per cent of those AUM are invested in Polish property and a further 3 per cent in Romania. In addition, the company manages and invests in a pan-European commercial property fund, Fprop Opportunities, which has so far made two acquisitions in Poland for a combined €25m. First Property also own two valuable commercial properties in Warsaw, one of which was valued last October at $18.1m, or £11.1m, based on a yield of over 8 per cent.
So, with sterling plunging by 4.5 per cent against the zloty and by 6.5 per cent against the euro since mid-February, First Property's real estate is benefiting from a strong currency tailwind. And that is hardly likely to change any time soon, with the European Central Bank firmly in monetary tightening mode and any chance of an interest-rate hike in the UK now far less likely after retail sales figures in March showed alarming signs of consumers retrenching.
By my calculations, if you mark the company's assets to market value, the shares are trading modestly above the book value of First Property's assets which means in effect we are getting a fast-growing property fund management operation - which analyst Chris Thomas at broker Arden Partners expects to make profits of around £3.1m this year - in the price for "virtually nothing". And there is also a decent 5.1 per cent decent yield on offer, based on a 5 per cent increase in the full-year payout to 1.08p, which Mr Thomas predicts. The board can certainly afford to raise the payout as it would be covered twice over by EPS of 2.18p.
So it's hardly surprising that the Aim-traded shares have started to be re-rated, rising 14 per cent to 21p, since I advised buying at 18.5p nine weeks ago - a price that was readily available at the time. But they are still too lowly rated on nine times March 2012 earnings estimates of 2.36p a share and, underpinned by a decent and growing yield - and benefiting from exposure to a robust Polish property market - I continue to rate them a strong buy ahead of the full-year results on 21 June.
Terrace Hill
UK property development and investment group Terrace Hill has made three separate residential sales worth £41.4m in its 49 per cent-owned residential joint venture in order to fund the next 18 months' amortisation requirements under the joint-venture's banking facilities. Although the transactions were priced £10m below aggregate book value, this still leaves potential upside from almost £200m of assets held within the joint venture. On balance, the deal looks sensible to me.
In addition, Terrace Hill has secured two notable new lettings at its office scheme in Maidenhead, generating annualised rent of almost £0.5m. A global pharmaceutical company and Seagate, the hard-disk drive and storage solutions provider, are renting a total of 19,000 sq ft of space at a headline rent of £26 per sq ft, which indicates there is still demand for quality space even in the tough Thames Valley lettings market.
Shares in Terrace Hill have moved also moved up 12 per cent from 20.5p to 23p - calculated on an offer-to-bid basis - since I advised buying in early February, and, trading on half their last reported net asset value of 48p, I continue to rate them a medium-term buy. The company next reports results for the six months to 31 March 2011 at the end of June.
Working that space
Workspace, a leading provider of industrial and office space to small- and medium-sized businesses in London, has been making noticeable progress realising value from its developments in recent months.
Three weeks ago the company entered into a development agreement with specialist London residential developer Mount Anvil, for the regeneration of Wandsworth Business Village, SW18. Workspace had already obtained mixed-use planning consent on the two-acre site for 209 apartments, a quarter of which will be affordable housing, and a new 80,000 sq ft business centre. The company will retain the overall freehold of the site and will receive half of any proceeds from the sale of the private residential apartments in excess of £50m.
And, in March, Borough Tower Hamlets granted consent for 557 apartments and a new 60,000 sq ft business centre at the company's Bow Enterprise Industrial Estate, close to the Olympic Park. Only a few weeks earlier, the Secretary of State granted permission for seven acres of land at Workspace's Tower Bridge Complex, in south London, to be redesignated as mixed-use. An application for 1,070 apartments and 90,000 sq ft of new commercial space is now going through the planning process.
The company has also entered into a five-year joint venture with BlackRock UK Property Fund to target high-yielding multi-let industrial or office buildings in London and the south east. The partners are committing £100m of equity into the venture - of which Workspace will contribute £20.1m - and it will be seeded with the sale of eight properties owned by Workspace worth £35m at an initial yield of 8.2 per cent. The proceeds of the disposal will reduce the company's debt and will lower its pro-forma loan-to-value ratio to around 50 per cent at the end of March 2011, according to analyst Michael Burt of Espirito Santo.
Given this positive newsflow, it is hardly surprising that shares in Workspace have been making progress and, at 27p, they have risen 20 per cent since I advised buying at 22.5p (). Moreover, they are now closing in on my upgraded target price of 29p (). That target price looks very achievable as it equates to Oriel Securities' triple net asset value (NAV) estimate of the company and is a 17 per cent discount to Espirito Santo's March 2012 NAV estimate. So, offering a further 7.5 per cent potential upside to my 29p target price, I remain a buyer of Workspace's shares ahead of its full-year results on 6 June.
Lok that value in Store
An interesting note dropped into my in-box last week from Miranda Cockburn of Matrix Corporate Capital. Titled, 'Small but interesting'; the broker made a pretty strong case for shares in self-storage company Lok'n Store, a company that I initially recommended buying at 100p ('). Having hit my target price of 140p a share last December, the shares have drifted back on profit-taking to their current 112p.
As Ms Cockburn points out, this could be partly because: "Lok'n Store is considered too small by many, and with a limited free float and the uncertainty that Laxey's stake creates, we have some sympathy with the many potential investors who have discounted the company on that basis". However, she sees this as a buying opportunity and points out that: "The key to winning investor attention and ensuring share price performance will be securing refinancing for the company's revolving facility, expiring February 2012, and clarification of the potential for dividend growth."
Matrix has initiated coverage with a 123p price target, but I am more aggressive as I firmly believe that Lok'n Store will have little trouble refinancing its borrowings as the company trades well within its existing £40m bank facilities and interest cover of 6.8 times is very comfortable. The value of the property portfolio at the end of January 2011 was unchanged from the July revaluation, at £81m, and net borrowings of £21.9m also mean the loan-to-value ratio is hardly stretched at 27 per cent.
It's worth noting, too, that cash profit margins are improving - up from 41.8 per cent to 45.9 per cent year on year - as the company has been able to push through price increases as well as reducing operating costs. Despite this, occupancy levels have risen 2 per cent in the past year.
On a peer group basis, the shares also offer value - rated 31 per cent below the last reported net asset value (NAV) of 159p and a hefty 51 per cent below adjusted NAV of 229p which adds back deferred tax of £11.2m. This compares favourably with much larger rivals Big Yellow and Safestore, which trade on discounts of between 25 to 30 per cent to adjusted NAV. In the circumstances, I have no reason to alter my positive stance on the company, and continue to rate the shares a buy and reiterate my upgraded medium-term target price of 150p ().
Share recommendations: a recap
If you followed my advise to play footsie with the shares being relegated from the FTSE 100 following the FTSE International’s Quarterly Index Review in March, you should be sitting pretty (). To recap, I advised buying shares in the three laggards - African Barrick Gold, Alliance Trust and Bunzl - at close of trading on Friday 18 March in order to profit from a recovery in their prices as technical selling by index-tracker funds abated.
This appears to have happened, with shares in the three companies rising on average by 7 per cent in the following three weeks, well ahead of the 5.8 per cent rise in the FTSE 100 (prices taken up to close of trading on 11 April 2011). An investment in the trio is currently showing a 5 per cent return and, if you followed my advice, I would bank profits on this short-term trade as I now believe the shares have largely recovered from the prior technical selling that depressed valuations below fair value.
The next Quarterly Index Review takes place on Wednesday 8 June and any changes to the constituents of the FTSE 100 take effect at the market close on Friday 17 June. I will give my recommended trading advice nearer the time.
Credit market downgrades
Equity markets have been clearly spooked by news that credit rating agency Standard & Poors has cut its outlook on US sovereign debt. This has been great news for the gold price which had already retraced back to my optimum buy in price around $1440/oz last week before surging to highs close to $1500/oz on news of the potential credit downgrade.
However, it has been bad news for my post Budget trade on the FTSE 100, having recommended buying the index at 5903 earlier this month. At the time of going to press on Tuesday 19 April, the index was trading back around this level and with the global equity market indices likely to remain volatile for some yet, and risk aversion high, I would now advise closing the position if you followed my advice.
