Moreover, the shares had already hit my upgraded balance sheet derived target price of 32p I gave when I last updated the investment case ('Bargain shares update', 12 November 2013), so much of the good news was already factored in.
Much improved financial profile
The surge in Terrace Hill's share price this year largely reflects a derisking of the company's balance sheet as assets were sold off and borrowings repaid. Major deals include the sale and forward funding agreement for a 1,104 unit student accommodation scheme in Southampton, and the disposal of the majority of the company's remaining residential assets. As a result, at the end of September, net borrowings had been slashed to only £17.8m including joint venture debt liabilities. That's down significantly on 12 months earlier when the company was saddled with net debt of £85.7m. Consequently, balance sheet gearing is now very comfortable at 29 per cent, compared with 142 per cent a year ago, as is a loan-to-value ratio of 28 per cent (2012: 49 per cent).
The obvious implication of this debt reduction programme is to significantly improve the financial risk profile on the company's remaining short-dated borrowings. The average maturity of the debt is only 19 months and it was the combination of high gearing and impending debt maturities that led to the hefty share price discount to net asset value previously. However, with a much lower debt to equity ratio, the risk of running short-dated debt liabilities is much reduced as is the refinancing risk. Terrace Hill has always operated this way and a relatively low weighted average interest rate of 3.5 per cent on its borrowings helps explains why it will continue doing so.
So with the finances under control, investors have been focusing on valuation and profit gains from the company’s operational activities to drive the share price higher. And it was a lower than expected end of year net asset value of 28.8p a share, albeit up from 28.3p a year earlier, which prompted the share price sell-off.
True, analyst Miranda Cockburn at broking house Oriel Securities still expects Terrace Hill's adjusted net asset value to increase to 32.9p by September next year, rising to 34.9p in 2015, as £19m of profits are booked from a number of developments, of which food store developments account for 60 per cent of the total. And chairman and 62 per cent shareholder Robert Adair has stated that his company's intends to recommence the payment of dividends shortly, reflecting the much improved financial position. Ultimately, though, the shares now look to be factoring much of the good news from Terrace Hill's remaining commercial property developments, including food store developments, leisure interests and office and retail developments in London. And it's for this reason that I have decided to bank a 104 per cent profits on the holding with the shares trading on a bid offer spread of 31.5p to 32p.
Finally, due to unprecedented demand, my new book, Stock Picking for Profit, has sold out and is being reprinted for delivery the week beginning Monday, 6 January 2014. As a special promotion to IC readers, the first 100 pre-orders for the book placed online with YPD Books and quoting offer code ICOFFER will receive complimentary postage and packaging. The book can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213. The book is only being sold through YPDBooks and no other source. It is priced at £14.99, plus £2.75 postage and packaging. Telephone orders will continue to incur the £2.75 charge.
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■ KBC Advanced Technologies ('Fuelled for more growth', 11 December 2013)
