At the time chief executive Robert Ware had just purchased 50,000 shares at 129p each to take his holding up to 3.55m shares, or 4 per cent of the share capital,. He was not alone as executive director Preston Rabl also splashed out £321,000 on 250,000 shares at a price of 128.5p to take his holding to 1.15m shares, or 1.3 per cent of the share capital. It is not difficult to see why the directors were delving deep to makes these purchases.
In the 12-month period, Conygar’s net asset value per share rose by over 5 per cent to 174.6p driven by the shrewd repurchase of around 4 per cent of the company’s shares at a bargain basement price of 97p, and a modest 2 per cent uplift in the valuation of the company’s investment portfolio which is now worth £165m, or 185p a share. But this is a conservative because planning progress has been gathering pace in the company’s development portfolio which is not reflected in the net asset value as these assets are held at cost.
Major planning permission not factored into book value
After a long consultation period with Pembrokeshire County Council, Conygar now has planning permission for its development at Haverfordwest. The 93-acre site will incorporate 835 residential properties and a 60,000 sq ft Sainsbury's retail food store with car park and petrol station. Located near the town centre, the site is valued in the company's accounts at £15.3m and accounts for almost half of Conygar's development projects, which are worth a total of £32.2m, or 36p a share. The plots at Haverfordwest are in the books for a modest £15,000 each, a valuation that looks well below open market prices. And by doing a smart-looking deal with Sainsbury's, Conygar has more than covered all the infrastructure and services costs through the net proceeds from the supermarket land deal. This significantly de-risks the residential development.
Moreover, I would not be surprised if the true market value of these residential plots is above £30m. This is significant since Conygar is only valued at £127m, a 18 per cent discount to its March 2013 net asset value of £155m. In other words, if the plots at Haverfordwest were marked to market value I believe this would add at least 17p to the current book value. And there is further development upside elsewhere since Conygar has a further six development projects with an aggregate carrying value of £16.9m.
The largest is the Holyhead waterfront development in Anglesey, Wales, which is in the books for £9.3m. Isle of Anglesey County Council has now granted grant planning permission to Conygar's joint venture with Stena Line Ports Limited for its mixed-use marina development. The scheme includes 326 apartments and townhouses; a 500-berth marina; 50,000 sq ft of marine-related retail, leisure, restaurants, hotel and office space, within a flexible design and in a prime location overlooking the marina. The company also has some potentially very profitable waterfront developments at Pembroke Dock and Fishguard.
Upside from a regional property play
If the development upside was not enticing enough, Conygar also offers a low-cost option on the recovery in the previously out-of-favour provincial property market. That's because at the end of September the company's regional investment portfolio was valued at £165m and generated an annual rent roll of £14.4m, producing a chunky 8.99 per cent yield. These properties, a mix of business parks, office, industrial and retail, are located in a variety of locations across the country, including Birmingham, Wolverhampton, Dundee, Aberdeen, Lincoln, Northampton and Stafford. Interestingly, the company is seeing early signs of a pick-up in the regional market.
True, the average unexpired lease is 4.8 years and the vacancy rate is around 16.7 per cent, which is high. But several lease negotiations are ongoing on vacant premises which should reduce the voids. And credit quality looks decent enough with between 95 to 97 per cent of rents collected within 10 days of the quarter end. In any case, with net debt only £38.9m at the end of September, and refinancing of the investment portfolio complete, there are no funding issues to worry about. In fact, Conygar has cash of £31.6m on its balance sheet and a further £22m available for drawdown under existing debt facilities, so has ample funding for opportunistic asset purchases.
The company’s loan-to-value ratio is modest at 23.6 per cent on the investment portfolio and the average cost of debt is 4.2 per cent. Finance costs of £3.7m are almost four times covered by the annual rent roll, which not only leaves extra cash spare for investment in the development pipeline and more opportunistic deals, but also for dividends and share buybacks.
In fact, this year’s payout has just been raised by 20 per cent to 1.5p a share, having been lifted by 14 per cent in the previous financial year. Conygar's policy is to provide some income return to shareholders, but for the most part retain profits for reinvestment in the business. But if the share price discount to net asset value is too wide, the board will also use cash to buy back shares. This makes sense as it immediately boosts net asset value per share, but it also removes stock from the market and underpins the share price. The board will seek approval to continue repurchasing shares at the forthcoming annual meeting on 6 February 2014, which can only be positive for the share price.
Needless to say, I continue to rate the shares a buy on a bid-offer spread of 140p to 143p and, having hit my initial target price of 152p in late October, I believe a price range around 160p to 165p is much fairer value for this type of regional property play with significant development potential. Buy.
Please note, I have written two columns today, both of which appear on my home page. In response to recent newsflow, I am currently working my way through a long number of updates including the following recommendations: Bezant Resources (BZT), Crystal Amber (CRS), API (API) and WH Ireland (WHI).
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