There should be further gains to come, too. Based on both fundamental and technical analysis, I believe a break-out above the 80p resistance level looks firmly on the cards, and one that should take the price to my target price of 90p at the very least. In fact, a close at 81p or above would signal a major triple top break-out on the point and figure chart. And with the 14-day relative strength index (RSI) not over extended, and the moving average convergence/divergence oscillator on the verge of issuing a buy signal, the technical set up is certainly positive.
Importantly, the fundamental case is, too. Demand in the warehouse and logistics market in Moscow remains very strong due to an under-supply of property and vacancy rates are below 1 per cent. As a result, demand in Raven Russia's portfolio remains robust. Currently, 97 per cent of Raven Russia's total of 1.4m square metres of its portfolio of Grade 'A' warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk is now let out. In aggregate, this space generates an annualised net operating income (NOI) of $192.2m (£119m), including pre-lets. The rent roll is set to rise further as Raven Russia has just signed a lease with Dixy, the large Russian supermarket operator, for 39,284 square metres of new-build space at the next phase of the company's Noginsk project in Moscow. The lease term is 15 years. Construction is due to start shortly and the building is scheduled to be delivered in the first quarter of 2015. The build cost is $48m and total income of $8.5m a year is expected. The 17.7 per cent rental yield on the property, which is well above the 11 per cent prime yield in Moscow, reflects a higher rental rate due to the specification of the building. As a result, the total potential annualised net operating income has increased to $207m across Raven Russia's portfolio.
Highly-profitable portfolio
So, with demand strong in an under-supplied market, and property developers generating bumper rents for prime space in Moscow, then Raven Russia's profits have been rising sharply.
In the first six months of this year, underlying earnings after tax almost doubled to $27.8m; operating cash inflow shot up 50 per cent to $74.4m (£48m); and fully diluted book value per share rose by 6¢ to 131¢, or 81.4p a share. For the full-year, analysts at broker Equity Development are predicting a 25 per cent rise in pre-tax profits to $97m to lift adjusted EPS by almost half to 10¢. At current exchange rates that equates to EPS of 6.4p a share, or 5.7p on a fully diluted basis.
In turn, this should mean the broad has scope to lift the payout further. In the first half, Raven Russia had a tender offer to buy back one in 40 shares at 80p, equivalent to a 2p a share dividend, a third higher than at the same stage last year. The rolling 12-month total distribution is 4.25p a share, which represents a yield on the shares of 5.3 per cent. For the full-year, analysts expect a total payout of 5p a share by way of a tender offer to boost the yield to 6.3 per cent.
Clearly, that's attractive and explains why investors have pushed the shares up to their highest level since August 2008. It's rationale, too, because with demand for new space strong, and the rent roll rising, predictions that Raven Russia's underlying pre-tax profits will hit £110m next year look well founded. On that basis, EPS rises sharply again to 12.4¢, or almost 8p in 2014, which offers scope for the payout to be lifted by 10 per cent to 5.5p a share as Equity Development forecasts.
Conservative valuations and attractive yields
So, not only do the shares offer an enticing prospective yield of 6.9 per cent for 2014, but we can expect further valuation uplifts to reflect the increased take up of space. Forecasts are for Raven Russia's book value per share to hit 136¢, or 85p a share, by the end of next month. It could be far more because commercial surveyor Jones Lang Lasalle used a 12 per cent yield to value the portfolio at the half-year stage. On that basis, the gross value of completed assets was $1.58bn and additional phases of completed assets were valued at $92.6m. However, with yields on prime logistic space now 11 per cent in Moscow, there is a strong case to make for lowering the average yield on Raven Russia's portfolio. I would not be surprised at all to see this happen to produce a net asset value figure north of 90p.
Investors are also attracted by the fact that Raven Russia has land available for new warehouses in Moscow and is supplying into a buoyant market, the dynamics of which Jones Lang Lasalle sees little chance of changing anytime soon. In fact, in a report, the valuers state "despite higher completions, increased demand led to a serious deficit in the market that will remain until the year end...and which will intensify thereafter: almost all warehouse space is already pre-let or sold."
Despite this positive backdrop, Raven Russia's shares are trading on a 6 per cent discount to very conservative spot net asset value forecasts, and more than likely a 13-15 per cent discount to a more realistic year-end book value around 90p if the company's properties are valued in line with the yields on prime Moscow warehouse space. That seems anomalous to me considering rental income is rising, vacancy rates are narrowing, and there is obvious scope for further valuation uplifts next year and beyond.
Offering an attractive prospective yield of 6.9 per cent, the shares continue to rate a decent buy on a bid-offer spread of 79p to 79.5p, and my fair value estimate of 90p is not only reasonable, but it could also prove conservative.
If you are willing to forfeit the yield, then the call warrants on Raven Russia (RUSW), which have an exercise price of 25p on a one-for-one basis and mature in March 2019, are another way of playing the potential upside. These are trading on a spread of 54p to 57p, so with the ordinary shares being offered in the market at 79.5p, this means that 54.5p of the call warrant premium is 'in the money' and only 2.5p is 'time value'. If the ordinary shares rise to my 90p, then we can expect the price of the call warrants to rise by 14 per cent from 57p to 65p. That's in line with the gain on the ordinary shares, but if Raven Russia's share price rises even more, then the geared effect of the warrants kicks in and the gains will be greater on the warrants.
Finally, I have published three columns today all of which are available on my home page. In response to recent newsflow, I am also currently working my way through a large number of updates on the following recommendations: Eurovestech (EVT), Bezant Resources (BZT), PV Crystalox Solar (PVCS), Crystal Amber (CRS), API (API), Mountview Estates (MTVW), Daejan (DJAN), Bovis Homes (BVS), WH Ireland (WHI) and Netcall (NET).
MORE FROM SIMON THOMPSON ONLINE...
In the past fortnight I have published articles on the following 12 companies:
■ 32Red ('Hitting the jackpot', 11 Nov 2013)
■ Macau Property opportunities ('Hot property plays', 12 Nov 2013)
■ First Property ('Hot property plays', 12 Nov 2013)
■ Inland ('Bargain shares updates', 12 Nov 2013)
■ Terrace Hill ('Bargain shares updates', 12 Nov 2013)
■ LMS Capital ('LMS worth capitalising on', 15 Nov 2013)
■ Trifast ('A bolt-on purchase', 18 Nov 2013)
■ Global Energy Development (Awaiting pay dirt, 19 Nov 2013)
■ Entertainment One ('Blue sky territory', 20 Nov 2013)
■ Marwyn Value Investors ('Blue sky territory', 20 Nov 2013)
■ Polo Resources ('Unloved and undervalued', 21 Nov 2013)
■ Heritage Oil ('Bargain shares update', 21 Nov 2013)
