However, one announcement that really caught my eye was from London-listed property developer Macau Property Opportunities (MPO: 177p), the closed-end investment fund registered in Guernsey and listed on the London Stock Exchange's main market. What sparked my interest was news that Macau Property has signed contracts to sell its Zhuhai properties, APAC Logistics Centre and Cove Residence, for a total combined RMB392m or US$64m (£41.05m) at current exchange rates.
Launched in 2006, the company targets strategic property investment and development opportunities in Macau - the gaming industry equivalent of Las Vegas - and Mainland China's western Pearl River Delta. Its portfolio was valued at $418m (£270m) at the end of March, mainly comprising a mix of well-positioned residential, retail and logistics property assets. So in this context the disposal is quite a sizeable deal. It is also one that will generate a huge profit for the company which is managed by asset manager, Sniper Capital.
That’s because the APAC Logistics Centre and Cove Residence is in Macau Property’s books at $33.4m, so the sale price - and contracts have been exchanged - represents a near 100 per cent uplift on the carrying value in the company’s accounts. It seems a fair valuation for a 1.3m sq ft warehouse development that also encompasses a 215,000 sq ft residential development of 484 entry level apartments. To put the deal into perspective, Macau currently has 88.5m shares in issue so a $31.6m development gain equates to a £20.3m uplift on book value, or the equivalent of 23p a share. That’s a pretty significant sum considering Macau Property’s shares trade at 177p, valuing the company at £156m.
Good news story
The good news story doesn’t end there either because when Macau Property last updated the market in May, the board revealed that net asset value per share had shot up by 13 per cent in the first quarter to end March, reflecting a strong underlying performance from the property market, opportunistic asset sales and an ongoing share buyback programme.
At the end of March, the company’s book value was 362¢, or 233p a share at current exchange rates. Interestingly, the sale of an iconic penthouse apartment, The Sky House, exchanged hands for $19.4m in March, yielding a hefty $6m net profit for Macau Property. If that sounds impressive, then bear in mind the company only bought the property for $12.57m in April last year. That gives you some idea of how rampant the real estate market is in the region. In fact, The Sky House only had a carrying value in the accounts of $15.7m at the end of last year so the sale price represented a 23 per cent premium to book value. Moreover, given the huge gains made on disposals, these two deals also indicate that Macau Property’s portfolio is being conservatively valued.
Expect bumper valuation uplifts
It also means that we can expect Macau Property to report a huge increase in net asset value when the company announces its half-year results at the end of September. Even if we ignore the fact that the rest of the portfolio will have increased in value, the uplift alone from the sale of the APAC Logistics Centre and Cove Residence adds 23p a share to the company’s end March net asset value of 232p.
It’s worth noting too that Macau Property has been aggressively buying back shares to take advantage of the share price discount to net asset value. In April, the company purchased 3.79m shares at prices between 142p to 145p and only last month acquired a further 1.5m shares at 168p. These follow on from the repurchase of 1m shares at 140p at the end of March, and 7.22m shares repurchased at an average price of 108p in the second half of last year. It’s a really smart move by Macau Property’s board because by repurchasing shares in this way the company is immediately enhancing net asset value per share and taking institutional stock off the market. As a result this stock repurchase mechanism is helping to underpin the steady increase in the company’s share price.
For instance, the share repurchases in the second half of last year boosted net asset value (NAV) per share by over 3 per cent. By my reckoning, the share buy backs made since the end of March this year - 5.29m shares repurchased, or 5.65 per cent of the share capital at an average price of 150p - have added £4.65m to book value. So with only 88.5m shares in issue those well timed buybacks have added another 5.25p a share to Macau Property’s NAV per share.
In other words, taking a very conservative approach, I reckon that the company’s book value per share is currently at least 260p, up from 213p at the end of December. That’s a hefty 22 per cent increase in net asset value in only six months and that headline figure will stand out when Macau Property reports results in a few weeks time. I would not be at all be surprised if the uplift is far more.
What this also means is that the company’s shares, at 177p, are still trading on a 32 per cent discount to my conservative forecast of spot net asset value. And with the loan-to-value ratio on the $418m investment portfolio only 21 per cent - net debt was $87.9m at the end of March - the board have ample funds to continue buy backing shares especially as $64m will be boosting the coffers when the sale of the APAC Logistics Centre and Cove Residence completes. In turn, this will further support the share price and simultaneously boost NAV per share as long as shares are being repurchased at a discount to book value. It’s a win, win situation.
Sound fundamentals
Importantly, growth in the gaming industry is showing no signs of slowing down. For example, Macau's accumulated gaming revenue in the first three months of 2013 reached $10.7bn, or almost 15 per cent higher than in the same period last year. Gaming revenue for March surged by a quarter year-on-year to a new monthly record of US$3.bn. Industry experts attribute the impressive growth to a recovery in the VIP gaming segment, where gross revenue rose almost 10 per cent year-on-year in the first quarter of this year. Current forecasts are for an overall growth rate in gaming revenue in the mid-teen percentage range this year.
The mass-market gaming segment continues to grow strongly too. In the first quarter of 2013, gaming revenue soared 27 per cent year-on-year to $3.4bn, accounting for nearly one-third of total gaming revenue. The number of mass-market package tourists visiting Macau increased 18.3 per cent in January and 21.6 per cent in February compared to the same months last year.
So given these dynamics it’s hardly surprising that the number of hotels and guesthouses in operation in Macau has been rising, providing 28,122 rooms as at the end of February, an increase of 26 per cent year-on-year. In the first two months of 2013, the number of hotel guests increased by 13.2 per cent with average occupancy rates around 80 per cent. And with money flowing into the region Macau 's government expects the territory's real GDP growth to increase in the low single-digit percentages in 2013 which is all rather good news for Macau Property given its exposure to the property market in the region.
Blue sky territory
As I alluded to the start of this article, investors have yet to fully factor in the investment gains, nor the uplifts from the share buybacks, into Macua Property’s share price. True, the price is at an all-time high, but it is only modestly up on the level a couple of weeks ago when the most recent asset sale was announced.
Needless to say, I rate Macau Property shares a value buy on a bid-offer spread of 176p to 177p ahead of the forthcoming half-year results. My target price is 220p to narrow the share price discount to my conservative adjusted net asset value estimate to 15 per cent and my time frame for this trade is three months.
In response to requests from dozens of readers, I have published an article outlining the content of my new book, Stock Picking for Profit: 'Secrets to successful stock picking'
