A fat dividend yield can be a dual signal. On the one hand, it flags up a mispriced share; on the other, it suggests investors don't believe the dividend can be sustained.
- Fat dividend yield
- Merger will strengthen the balance sheet
- Solid portfolio
- Nice rental yield
- Needs to raise capital
- Property values cut
We think shares in property company Redefine fall into the former camp. Investors have shied away because Redefine has £314m-worth of debt due for repayment next year – the result of a convoluted corporate background.
True, the debt is a concern. But, because Redefine has a majority shareholder who has pledged more equity, the refinancing risk is acceptable. It looks a good move to buy the shares now, before the new equity is raised and the City wakes up to what otherwise looks a solid income story.
Redefine is the European investment arm of a large South African property group, also called Redefine. It used to own a portfolio of UK shopping centres and hotels, plus a 22 per cent stake in Wichford, a property fund with a focus on government offices that carried too much debt in the downturn. This year Redefine bid for the rest of Wichford's shares, whose owners had little choice but to sell as most of the company's debt matures in 2012.
The result is a merged entity still called Redefine. It has Wichford's listing on the main market, owns £1.09bn of property and owes £824m of debt.
REDEFINE INTERNATIONAL (RDI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 40p | MARKET VALUE: | £227m | |
| TOUCH: | 39-40p | 12M HIGH / LOW | 60p | 38p |
| DIVIDEND YIELD: | 11% | TRADING STOCK: | NIL | |
| DISCOUNT TO NAV: | 18% | |||
| INVEST PROPERTIES: | £348m | NET DEBT: | 145% | |
| Year to 31 Aug | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 109 | -34.9 | -39.7 | 6.01 |
| 2009 | 58 | -47.9 | -54.2 | 3.05 |
| 2010 | 47 | -5.4 | -2.5 | 3.21 |
| 2011* | 45 | 14.4 | 3.0 | 4.12 |
| 2012* | 49 | 23.9 | 3.8 | 4.40 |
| % change | +9 | +66 | +26 | +7 |
NMS: 20,000 Matched bargain trading Beta: 0.5 *Evolution estimates (includes the effects of Wichford acquisition) | ||||
That wouldn't be attractive but for the commitment of Redefine's parent to underwrite a £100m equity issue. The South African Redefine currently owns two-thirds of the UK Redefine and, as part of the merger, agreed to maintain that stake in a rights issue.
Crucially, the merger agreement also stipulated that the rights issue be done at close to the market price of the shares. Other shareholders could reject the plan, in which case the parent would stump up the full £100m. But that's unlikely. The minority shareholders, who are mostly institutional investors, won't want to be diluted. Retail investors should buy half their intended stake now and wait for the rights issue to subscribe the remainder.
They will own a share of a diverse portfolio of government-let offices, shopping centres and hotels in the UK (71 per cent); a stake in a listed Australian property company (9 per cent); and offices in Germany, Holland and Switzerland (20 per cent).
The key quality of this portfolio is its high rental yield – 7.25 per cent, reckons John Cahill at broker Evolution Securities. The rent is also backed by a stable group of tenants. Redefine's portfolio had a vacancy rate of just 1.6 per cent in February; the equivalent figure for Wichford was 4 per cent.
The outlook for capital values is a little shakier. Surveyors marked down the value of Wichford's buildings in February because its public sector tenants cannot be considered the super-safe bet they once were. Yet they won't default and there are, on average, nearly nine years left on Wichford's leases.
