In the 12 months to end-June, adjusted net asset value per share rocketed by 31 per cent to a record 395c, or 260p a share, driven by a 28 per cent rise in the value of the property portfolio from $353m to $453m (£283m). This is by far the most successful year for the company, but the strong demographics driving the market should provide ample scope for further upside in both the portfolio and the shares, which still trade on a wholly unwarranted 26 per cent discount to book value.
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 mainly comprises a mix of well-positioned residential, retail and logistics property assets. And as I pointed out three weeks ago, Macau Property has been making some eye-watering returns on its investments.
Bumper revaluations
For instance, since the financial year-end the company has agreed the sale of its Zhuhai properties, APAC Logistics Centre and Cove Residence, for a total combined RMB392m or $64m (£41.05m) at current exchange rates.
To put this disposal into some perspective, the deal has been priced at a 42 per cent premium to the carry value of $45m in the June 2013 accounts and that's after a 56 per cent year-on-year valuation uplift. So when the sale completes, Macau Property's net asset value will receive a further $19.6m boost worth 22c, or almost 14p a share. And the agreed sale price 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. Importantly, the purchasers paid a non-refundable deposit of £4.1m to Macau at the end of last month.
Expect more upside from Macau Property's other developments, which include The Fountainside, a development of 38 apartments and four villas encompassing an area of 80,000 sq ft and which has been revalued at $65m, up from $42.2m in June 2012. To date, Macau Property has invested $21m in The Fountainside and has pre-sold 20 apartments covering an area equivalent to 35 per cent of the total square footage of the development. The project is now in its final stages and marketing of the villas will commence soon.
Macau Property also owns The Waterside, a 148,000 sq ft development of 59 luxury apartments which has been valued at $221m, up 23 per cent in the past year. Rental levels in the residential tower are now at record levels and occupancy rates have hit more than 90 per cent.
Sound fundamentals
Importantly, growth in the gaming industry is showing no signs of slowing down. For example, Macau's gaming revenues rose by 15 per cent in the first half of 2013 and are expected to top $43bn this year. If forecasters prove correct in their expectations for gaming revenues to hit $70bn in 2017, rising to $100bn in 2020, then the city's economy is going to be buoyant for some time yet.
Gaming revenues are not the only thing that's booming: according to The Economist Intelligence Unit, Macau, which has a population of 568,000, is expected to report a 14 per cent increase in GDP this year. Retail sales are rampant, too, and have already doubled in the past three years. Industry experts predict they will rise a further 19 per cent to $8bn in 2013. Given this backdrop, it's hardly a surprise that rental values for luxury brands and high-end retailers are buoyant. It also means that demand for the company's apartments looks well underpinned.
Good news story
The good news story doesn't end there either because 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 and 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. These purchases have shrunk the issued share capital by 12m shares to 88.5 shares.
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.
Moreover, the message from this week's results is crystal clear: share repurchases will continue to remain a top priority for the company as long as the share price trades on an unwarranted discount to the book value. The board can certainly afford to use surplus cash in this way. That's because, at the end of June, Macau Property's loan to value ratio was only 20 per cent, so with only $90m of borrowings the $453m investment portfolio is conservatively geared.
This means the board has ample funds to continue to aggressively buy back shares, especially when the sale of the APAC Logistics Centre and Cove Residence completes. In turn, this will further support the share price and simultaneously boost net asset value per share - as long as shares are being repurchased at a discount to book value. It's a win, win situation.
Blue-sky territory
As I pointed out in my article earlier this month, investors have yet to fully factor in all the investment gains and valuation uplifts from future share buybacks, into Macau Property's share price.
Moreover, even if my conservative target price of 220p is achieved, as seems highly likely on the back of these sensational results, the share price discount to pro-forma adjusted net asset value of 273p (taking into consideration the completion of the APACs property sale) would still be 20 per cent.
Needless to say, I continue to rate Macau Property shares a value buy on a bid-offer spread of 192p to 193p. Buy.
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