However, a little under three months ago I made an exception as I saw compelling value in the shares of Aim-traded Dragon-Ukrainian Properties & Development (DUPD: 35p), an owner and developer of shopping centres and residential properties in Ukraine. The share price then is the same as it now, but given events in the country in the interim I have an important decision to make whether to hold onto these seriously undervalued shares or head for the exit.
It would be easy to bail out as the distress signals emerging from the country are obvious for all too see. Not only have hundreds of thousands of ordinary people taken to the streets of the capital Kiev in a pro-EU uprising to protest over the government’s decision to turn its back on an integration agreement with the EU and pursue closer ties with Russia, but the ruling party of President Viktor Yanukovich had to endure a no-confidence vote in Parliament yesterday. Prime Minister Mykola Azarov then informed parliament that his government will continue talks with the EU on a deal, but will also hold talks on resolving trade problems with Russia. If the administration of Ukraine was playing a game of double bluff to secure better terms from the EU free trade and association agreement, then it has backfired in spectacular fashion as Moscow has used trade and economic pressure to try to deter Kiev from signing with Brussels.
It’s an impossible situation for a country to resolve given that Vladamir’s Putin’s Russia has been tightening the screws on Ukraine for months now. Shipments of goods have been blocked and punitive import tariffs imposed on exports from Ukraine to Russia. For a country in financial distress, this could not have come at a worse possible time. The economy shrank by 1.5 per cent in the third quarter, foreign exchange reserves have been falling all year and represent little over a couple of months worth of imports, bad debts in the banking sector have surged and to compound matters there is the little matter of a near-$11bn debt rollover due next year at a time when the country is completely shut out of financial markets. In the circumstances, it’s hardly a surprise that the price of insuring the country’s debt has rocketed with sovereign debt now trading at junk-rated levels. Sovereign dollar bonds due for redemption in June 2014 hit a record high yield of 19.34 per cent this week as investors, spooked by a government in disarray and rioting on the streets of Kiev, dumped the paper. Even five-year government bonds are yielding well over 10 per cent.
A little over two decades after the collapse of the Soviet Union, Ukraine remains firmly in the grip of its larger neighbour who refuses to let the satellite state go west. The country is stuck in the middle of a power struggle between the economic power and prestige of the EU and the Kremlin wielding its power over the old Soviet bloc. There is no simple solution as even if the Ukrainian government does another volte face and signs with the EU, which would be positive for credit markets and its financial institutions, the country can expect a backlash from the Kremlin, in the short-term at least. And if Ukraine becomes a satellite state of Russia once again, the EU dream would be over. As impasses go, it doesn’t get much worse than this.
In this context, investors have good reason to steer well clear of the region. It no longer matters to them that that four of Dragon-Ukrainian Properties' 10 projects are now self-funding and cash-generative. Nor that the company is targeting cashflow generation from its development and operating assets and still has a cash pile worth almost £12m ($18.9m) on its balance sheet, or a third of its market value. Unlike other highly encumbered and overly indebted property companies that used lines of credit to fund their acquisitions, Dragon-Ukrainian Properties is not a forced seller of any of its assets.
Investors are also ignoring the fact that the company still owns a 12.5 per cent stake in Aricanno, one of the leading real-estate developers in Ukraine specialising in operating shopping centres, and one that has just listed its shares on the Alternative Investment Market. This stake alone is worth $33m, or £20m. So with Dragon commanding a princely market value of only £38.3m, investors seem happy to value the rest of Dragon’s portfolio - worth $128m (£78m) - at a bargain basement £6m. That’s less than 8p in the pound.
Clearly, there is value in those assets, but I would be deluded to think that the shares are going to be re-rated until the impasse between the EU and Russia is resolved. But clearly it has to as the current situation is untenable. Equally I find it difficult to bail out of a cash rich company which is so well underpinned by hard assets including some substantial residential schemes, not to mention prime real estate shopping centres.
So, although I have taken my recommendation on the shares down a notch to hold, I have decided to ride this one out.
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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■ Equity market strategy ('Betting on a Christmas rally', 26 Nov 2013)
■ Eurovestech ('Kalibrate to fuel Eurovestech', 27 Nov 2013)
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■ Housing market ('Allaying fears of housing myths', 3 December 2013)
