It therefore makes a lot of sense to identify companies where the odds of a significant rerating are as heavily weighted in your favour as possible and to time your entry to the last available point before that revaluation is likely to take place. This is why I try to identify companies whose shares are on the point of a share price break-out and one underpinned by the fundamentals supporting the investment case. In recent months, this has worked a treat on a host of companies I have recommended, including Netplay TV (NPT), Aurora Russia (AURR), Netcall (NET) and Communisis (CMS). We should all be heavily in profit on all of these special situations. For good measure, I have identified yet another special situation this week - Russian warehouse developer Raven Russia (RUS), and found a really smart way of profiting from what is highly likely to turn out to be a multi-week rerating.
Time to play Russian roulette
Loyal readers of this column will note that we have made significant profits on this property play in the past. It's not a difficult business to understand since Raven Russia owns a portfolio of around 1.3 million square metres of Grade 'A' warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk. Of the portfolio, 69 per cent is located in Moscow where tenant demand remains strong, so it's hardly surprising that rental income for the portfolio has been rising sharply, too, as tenants sign leases for new space and warehouses fill out.
In fact, when the company unveiled its 2012 financial results this week, net rental income had risen from $91.7m to $136.5m (£91.3m) and underlying operating profit had surged by 63 per cent to $112m. Rents remained around $130-$135 per square metre for Grade 'A' warehousing throughout last year and with valuations on the up, Raven Russia booked a revaluation surplus of $69m to take the portfolio's total value to $1.5bn. But that hardly looks a punchy valuation since it equates to a yield of 11.9 per cent on a fully let portfolio with net operating income of $179.5m (not including phases under construction).
At the financial year-end, net operating income was around $170m, so it's not as if the completed portfolio has massive voids, either. In fact, factoring in pre-let agreements and letters of intent from tenants, including those on additional phases of construction at the company's Noginsk and Klimovsk projects, net operating income increases to around $179m as surveyors at Jones Lang LaSalle used in their valuation. Fully let, annualised net operating income rises even further to $190m, which is worth noting. That's because as rental income grows and yields on Russian industrial property shrink from what are still elevated levels by international standards, Raven Russia is set to benefit from a tailwind of rising valuations driven by rising rental income and valuation gains from a yield shift.
Value on offer
But even before this happens, there is obvious value in Raven Russia's shares, which trade on a 19 per cent discount to adjusted diluted net asset value of 125¢, up from 119¢ a year ago. At current exchange rates, book value equates to 84p a share. Plus, with sterling the whipping boy in the currency markets and seemingly heading lower against the greenback as investors react to the real possibility of further money printing in the UK (to buoy a fragile economy) as economic news from the US is improving, Raven Russia's UK-listed shares look set to benefit from currency gains on overseas investment holdings.
It's also worth pointing out that the total distribution made to shareholders of 3.75p a share (paid out of underlying EPS of 5.3p) through tender offers is not only highly supportive of the company's share price, but means that the equivalent yield is around 5.5 per cent, so there is substantial yield support, too. And with the tender price of 75p for the latest distribution set at a discount to book value of 84p, the tender process is actually accretive to net asset value.
Chart break-out looms
Raven Russia has been on my watch list for some time and in my view looks poised for a major break-out above 70p, a level that has capped progress for the past two years, ahead of a run up to 80p which acted as a major support level prior to the financial crisis in the autumn of 2008.
Frankly, I see little reason waiting for the break-out and would advise buying Raven Russia shares now, trading on a spread of 68.5p to 69.3p, to capture as much of the 15 per cent share price upside as possible. And if you are willing to forfeit the yield, then the call warrants on Raven Russia (RUSW), which has an exercise price of 25p on a one-for-one basis and mature in March 2019, look a brilliant way of playing the potential upside. These are trading on a spread of 42.5p to 45p, so all the call warrant premium is 'in the money' and there is no 'time value'. But if I am proved right and the ordinary shares rise to 80p by the end of April, then we can expect the call warrants to rise 22 per cent to 55p, giving around 50 per cent more than the return on the ordinary shares. Needless to say, I rate both Raven Russia's ordinary shares and the call warrants strong buys.
