Shares in Aim-traded vulture fund Conygar (CIC) offer an excellent way to profit from one of the last pockets of financial distress left by the banking crisis: UK provincial property. This market has been out of favour for so long that it is easy to dismiss it, but that would be foolish.
- Shares trade far below book value
- Provincial property values bottoming out
- Strong balance sheet
- No legacy problems
- Modest dividends
- Development profits not yet flowing
Conygar offers a triple value play. At 122p, its shares trade at 28 per cent below forecast estimates of September 2013 net asset value (see table). Second, that book value includes £173m of properties bought at rock-bottom prices and still valued on the basis of high yields. Finally, the company has substantial development projects in Wales that are on the books at cost. Progress has been slow, but chief executive Robert Ware expects development profits to start flowing towards the end of this year.
Granted, there are good reasons why investors have avoided UK provincial properties. Even though valuations have looked low relative to bond yields or London properties for some time, they have kept falling as banks forced zombie landlords to sell. And many offices built in the boom of the late 1980s are now considered obsolete, so their values are being hacked as 25-year leases approach expiry
Conygar is not immune to these problems. Its investment portfolio of offices and some industrial estates was marked down 2 per cent over the six months to 31 March. Management soberly predicted that the portfolio would "continue to drift" in the short term.
Yet there are signs the market is beginning to turn, at least in the south east. Some companies report that borrowing is becoming easier, while yield-hungry City institutions are now priced out of London by international investors. In April, the pace of valuation declines nationwide slowed to its lowest rate in 17 months, with over 30 per cent of provincial assets no longer falling in value, according to index-provider IPD.
CONYGAR INVESTMENT COMPANY (CIC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 122p | MARKET VALUE: | £109m | |
| TOUCH: | 119-122p | 12-MONTH HIGH: | 125p | LOW: 82p |
| DIVIDEND YIELD: | 1.1% | TRADING PROPERTIES: | £22.5m | |
| DISCOUNT TO NAV: | 28% | |||
| INVESTMENT PROPERTIES: | £173m | NET DEBT: | 35% | |
| Year to 30 Sep | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 140 | 13.69 | 32.27 | nil |
| 2010 | 151 | 14.88 | 12.13 | 1.00 |
| 2011 | 155 | 1.76 | 0.98 | 1.10 |
| 2012 | 166 | 7.46 | 5.60 | 1.25 |
| 2013* | 169 | na | 6.20 | 1.30 |
| % change | +2 | – | +11 | +4 |
Normal market size: 2,000 Matched bargain trading Beta: 0.3 *Oriel Securities estimates (NAV and EPS not comparable with prior years) | ||||
The resilient companies are those with sustainable rental income. In that respect, Conygar should be safe enough. It pieced together its portfolio after the crash in deeply discounted deals that gave it scope to cut rents. That's now obvious in the pattern of lettings and lease renewals - the company increased its rent roll by 2 per cent to £16.1m in the six months to the end of March. The vacancy rate ticked up to 11.4 per cent, although management says current negotiations may reduce it again.
Another reason investors have ignored Conygar is that its development plans are far from London - the company wants to build marinas on the Welsh coast for Manchester's yachting set. Yet the potential upside on the 2,000 or so residential units in its planning process is substantial, if opaque. With housebuilders increasingly bullish, at least Conygar should not struggle to sell once it gets planning permission.
