Moreover, as we move into the traditional sweet spot for stock markets between Halloween and early May, it’s only reasonable to expect further gains from the vast majority of the companies I have recommended buying shares in. These include a number of the companies on my watchlist which have issued trading updates in the past week, so are in need of updating.
On solid foundations
I have been taking another close look at Aim-traded property fund manager First Property Group (FPO: 24p) after the company announced yet an interesting property deal at the end of last week.
To recap, I advised buying shares in the company in November last year when the price was around 18p ('Hidden value', 20 November 2012). Since then, we have picked up an interim dividend of 0.33p a share and a final payout of 0.75p a share in September. Combined, this gives an annual dividend of 1.08p, so at the current price of 24p the shares still offer a decent yield of 4.5 per cent. The payout is well covered by EPS of 2.2p in the 12 months to end March, so looks safe - especially as currency adjustments understate the true EPS figure by quite some margin.
Importantly, the investment case remains sound, so much so that I reiterated my buy advice a couple of months ago when the price was 22.5p (‘Shares with hidden value’, 12 August 2013). I have little reason to change that positive view.
Smart management team
To recap, the company is run by a shrewd management team led by chief executive Ben Habib, who made the wise decision to exit UK commercial real estate before the bubble burst and turn the company's attention to Poland, the only country in the European Union that didn't fall into recession during the financial crisis.
It proved a prescient move as First Property benefited from the upside on two directly held office properties in Warsaw, one of which has now been sold, as well as the significant funds flowing into the eastern European property market. Investors have done well, too, as First Property's investment performance is ranked number one versus Investment Property Databank's (IPD) Central Eastern European universe over the past seven years to end December 2012.
However, the financial and economic crisis clearly changed the dynamics of the eastern European property investment market, which prompted Fprop Opportunities, the company's 76 per cent-owned Polish-focused fund, to sensibly suspend purchases of properties last year. Only one property purchase was made by the six closed-end funds managed by First Property in the financial year to end-March 2013.
At the end of August, these funds had £348m assets under management, of which around 70 per cent of the properties are located in Poland, and a further 26 per cent in the UK. The good news is that the Polish commercial real estate market is starting to improve so we can realistically expect positive newsflow on property deals there in the coming months.
Move into residential property
Equally promising is last week’s announcement that First Property has formed a partnership with clients to invest in office buildings in the UK with a view to converting these to residential use. The partnership, which is closed ended, has a life until May 2018.
Clients have agreed initially to commit £12m to the venture, with an intention to increase this to £40m within three months. First Property will commit 5 per cent of the equity raised subject to a limit of £2m and manage the partnership, but will not levy any fees for its services. It will instead be paid 20 per cent of the profits earned by the partnership, as these are earned, subject to claw back in the event of losses.
This is the second deal the company has done in this area in recent months. In July, First Property splashed out £3.4m of the £13m cash balance held on its balance sheet buying seven largely vacant offices, one in Bracknell in the Thames Valley and the others in Old Woking, Surrey, which it plans to convert into housing. This was another smart deal since the company is exploiting the oversupply of offices in the regions in order to sell these properties as residential units into what is not only a buoyant housing market in the south east of England, but one underpinned by a housing shortage. Furthermore, priced at only £62 per sq ft, First Property has negotiated a good deal too.
The move into residential property also puts to good use the company's cash, especially as its UK Pension Portfolio fund is fully invested and has £90m of assets under management, mainly retail warehousing and properties in the retail sector. That fund is producing an ungeared return of 6.45 per cent and has a minuscule vacancy rate of 0.6 per cent. This produces useful fee income as does First Properties' USS Fprop Managed Property Fund, which has £224m of property under management in Poland. True, the mandate for the US fund expires in a couple of years time, but clearly First Property is making headway in building up a replacement income stream through its UK residential activities.
The fee income from funds aside, there is value in First Property's balance sheet worth highlighting.
Uncovering value in the balance sheet
First Property has one remaining directly owned property holding, Blue Tower, an office tower in the central business district of Warsaw, in which it has a 28 per cent interest. It has proved a shrewd investment, rising by 52 per cent in value from $12.9m (£8m) in December 2008 to $19.5m (£12m) at the end of March this year. The property contributed pre-tax profits of £962,000 last financial year to the company, or around a quarter of group profits.
Interestingly, First Property conservatively holds Blue Tower at cost in its accounts, which means that the net asset value of the company - £18.5m at the end of March, or 14.4p a share - understates its true worth. In fact, mark the Warsaw property to market value and First Property's book value rises a further 3.3p to 17.7p a share. Not that the company is looking to sell the property.
It's also worth noting that First Property values its interests in all the funds at cost. However, if these were marked to market value the carrying value of these investments would be over £11m, rather than the £8m stated in the company's latest accounts. The additional £3m equates to 2.3p a share, and means that when combined with the hidden value of the Blue Tower Property, the company's net asset value is actually 20p a share, rather than the 14.4p stated in the accounts.
Attractive valuation
What this means is that First Property’s share price of 24p is heavily backed by property assets and investments, which leaves a highly profitable fund management business virtually in the price for nothing. In fact, analyst Clive Thomas at Arden Partners calculates that the company's own cash, property and investments are worth 25p, or more than the current share price. The valuation becomes even more anomalous once you factor in the move into residential property and the chunky profit potential it could make on a fund worth £40m.
Trading on 11 times earnings and yielding 4.5 per cent, I continue to rate First Property a decent medium-term buy on a bid-offer spread of 23p to 24p. My target price is 27.5p, which could prove conservative. In fact, a return to the 2000 high of 29.5p is not an unrealistic possibility if the company's management continues to pull off further deals targeting the residential property market.
■ Finally, as a pre-Christmas offer exclusive to Investors Chronicle readers, all telephone orders placed with YPDBooks for my new book Stock Picking for Profit will receive complimentary postage and packaging. This offer is strictly for a limited period, is subject to stock availability and applies to only telephone orders placed until Friday, 15 November 2013.
Please note the book is only being sold through YPDBooks and no other source. Full details of the content of the book is available online at www.ypdbooks.com. If you would like to take advantage of this offer, please contact YPDBooks on 01904 431 213 and quote reference 'ICOFFER'. The book is priced at £14.99. Internet orders will continue to incur the normal postage and packaging cost of £2.75. I have also published an article outlining the content of the book: 'Secrets to successful stock picking'.
MORE FROM SIMON THOMPSON ONLINE....
I published seven other articles last week on the following 10 companies:
■ Trifast ('A timely bolt on purchase', 21 Oct 2013)
■ Noble Investments ('Bargain shares update', 21 Oct 2013)
■ Stanley Gibbons ('Bargain shares update', 21 Oct 2013)
■ Cairn Energy ('Bargain shares update', 21 Oct 2013)
■ Eros ('Time for some price action', 22 Oct 2013)
■ PV Crystalox Solar ('Time for some price action', 22 Oct 2013)
■ BP Marsh & Partners ('BP Marsh cashed up to invest', 23 Oct 2013)
■ Moss Bros ('New highs beckon', 23 Oct 2013)
■ Molins ('Smoking away', 24 Oct 2013)
■ Bloomsbury Publishing ('Decision Time', 24 Oct 2013)
