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OPINION

A flying start

A flying start
February 21, 2013
A flying start

A tasty investment

The eye-catching performance has been helped by what in hindsight has been some impeccable timing when it came to recommending shares in Terrace Hill (AIM: THG). Not only did the small cap property developer and investor announce a site sale and forward funding agreement with Legal & General Property for its 1,104 unit student accommodation scheme in Southampton city centre days before my article was published, but the company has subsequently exchanged contracts for the sale of the majority of its remaining residential assets, comprising 925 units, in a £70m deal. The disposal accounts for 95 per cent of Terrace Hill’s wholly owned residential assets and over 90 per cent of the properties held within Terrace Hill Residential, its residential investment joint venture in which it owns a 49 per cent interest. The sale was keenly priced, too, on a discount of less than 1 per cent of book value.

That’s important because once you factor in the net proceeds from both deals, Terrace Hill’s net borrowings are slashed from £47.2m at the September financial year-end to only £20.2m. In turn, this reduces balance sheet gearing from 78 per cent as stated in those accounts to only 34.6 per cent of current shareholders funds of £58.4m. It’s also worth noting that once you include the company’s share of associates' net borrowings, total net debt has also been slashed from £85.7m to only £26.7m which means that balance sheet gearing (including all non-recourse loans) is a modest 45.7 per cent, down from 142.1 per cent. And expect further debt reductions because Terrace Hill has started a programme of sales to owner occupiers for the remainder of the residential portfolio, which comprises 35 units located in Manchester and the South West that have a book value of £5.5m. Interestingly, Philip Leech, the chief executive of Terrace Hill, notes that “the few retained properties being sold on a piecemeal basis to owner occupiers are expected to achieve prices at levels in excess of book value.”

In the circumstances, it’s hardly surprising that the company’s share price has rocketed since it should have no problem at all refinancing the remaining short-dated debt which has a maturity of around 12 months. I didn’t expect there would be a problem when I advised buying the shares a couple of weeks ago, but in light of these large disposals (inline with book value), other investors have now cottoned on that there is significant value in the shares which, on a bid-offer spread of 20.5p to 21p, still trade on an unwarranted 22 per cent discount to EPRA net asset value of 26.8p.

Moreover, prospects for the remaining business are well underpinned. In particular, Terrace Hill has a secure pipeline of foodstore projects which have a build-out value of over £240m, so it's hardly short of work even if market leader Tesco has scaled back UK store expansion. Major clients in this segment include Sainsbury's and Asda. Currently, three new stores have been pre-let, forward funded and are under construction, another four sites are in the planning process and nine additional sites are under consideration. Forward funding the purchases not only mitigates the investment risk, but offers shareholders the visibility of net asset growth as profits from these schemes are banked when supermarkets complete on their property purchases.

So, given these positive fundamentals supporting the business, and the substantial strengthening of the company’s balance sheet in recent weeks, I can see further scope for the share price discount to book value to narrow in the months ahead.

How Simon Thompson's 2013 Bargain Shares Portfolio has performed

CompanyTIDMOffer price, 8 February 2013  Bid price, 20 February 2013 Dividends paid (p)Total return (%)
Terrace HillTHG15.420.5033.1%
Randall & QuilterRQIH113.3128013.0%
Inland HomesINL23.526.5012.8%
Trifast TRI51.958011.8%
Noble InvestmentsNBL199.421809.3%
Oakley Capital InvestmentsOCL139.715108.1%
FairpointFRP98.2510405.9%
Polo ResourcesPOL24.5325.504.0%
Heritage OilHOIL202.320300.3%
Cairn EnergyCNE287.2286.30-0.4%
Average9.8%
FTSE All-Share  3.0%
FTSE Small-cap index  2.1%
FTSE Aim index1.8%
Notes: Prices correct at 4pm on Wednesday, 20 February 2013    

A solid income buy

Shares in Randall & Quilter (RQIH), a specialist in managing the run-off of insurance companies and Lloyd's of London syndicates that have stopped underwriting new contracts, have also surged as investors have undoubtedly been attracted by the company's hefty dividend. True, founder and finance director Alan Quilter sold off 7 per cent of his holding on Friday, 15 February, at 122p a share netting himself £366,000. This follows large share sales earlier this month by executive chairman and chief executive Ken Randall and his son who both sold 1m shares each at 110p.

However, these sales by insiders need to be put into context as the Randall family still control shareholdings totalling over 19m shares, or 38.2 per cent of the issued share capital, and Mr Quilter owns a further 4m shares, or 8.1 per cent of the company. Moreover, managing the run-off of insurance companies and Lloyd's of London syndicates remains a hugely profitable business which underpins the payment of hefty and rising dividends. In fact, in the past three years Randall & Quilter’s board has paid out 23p a share of dividends: 8.3p a share in 2012, up from 7.65p in 2011 and 7.1p in 2010.

To put that into perspective, at 130p, Randall & Quilter shares are offering an attractive 6.4 per cent historic yield covered 1.6 times by forward EPS of 13.4p. The progressive dividend policy looks set to continue, too, given the vested interest in the business from the founders who still retain sizeable holdings. For good measure, the company’s shares only trade on 10 times earnings and well below book value of 139p. Income buy.

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written no fewer than 34 online articles, all of which are available on my homepage. These include articles on the following companies:

WH Ireland (Broking for a successful recovery, 19 February 2013)

Anglo Asian Mining ('Glistening investment loses its shine', 18 February 2013)

Communisis ('A fundraising well worth backing', 18 February 2013)

Town Centre Securities (A high yield property play in the north, 18 February 2013)

API ('A conundrum to solve', 15 February 2013)

Daejan Holdings ('Buy the breakout', 14 February 2013)

IQE ('Time to dial into profit', 13 February 2013)

Mountview Estates ('Chart break out for a solid income play', 12 February 2013)

Bellway ('Seeking Alpha', 11 February 2013)

Marwyn Value Investors ('A highly profitable arbitrage play', 11 February 2013)

Netplay TV ('A share set to hit the jackpot', 11 February 2013)