To recap, 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. And with 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 board 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.
That’s not just attractive, but with book value set to grow to 85p at least by the end of this month, then there is obvious scope for the share price discount to net asset value to narrow further. That possibility is even more likely now because the company is offering holders of half its 194m preference shares the chance to convert these to ordinary shares at the rate of two new ordinary shares for each preference share held. Shareholders have until Friday, 20 December to make a decision and the general meeting is scheduled for Monday next week. In my view, it would be sensible to vote in favour of the motion and convert the preference shares.
Do the calculation
That’s because following a hefty rise in the price of Raven Russia's preference shares (RUSP) they are now trading at around 157.5p, or 57.5 per cent above par value of 100p. On this basis, a holder of one preference share is currently earning 12p in fixed income (the issue was priced on a yield of 12 per cent in March 2009), but has the chance to swap this income stream for one paying 10p a share, and rising, on the two ordinaries. The value of two ordinary shares is around 160p, so there is no capital loss incurred by converting the preference shares into ordinaries on these terms.
In addition, that lost income of 2p a share on each preference share converted will diminish as Raven Russia raises the payout (made through a tender process) on its ordinary shares in the coming years. In turn, as the payout rises, it is only reasonable to expect Raven Russia’s share price to rise accordingly to reflect the rising income stream. The same can not be said of the preference shares which pay a fixed income and are already trading well above par value.
In other words, this is an opportunity to crystallise the gains on the preference shares and lock into a rising income stream on the ordinaries. The terms look sensible and although there will be short-term dilution to net asset value per share due to the extra 194m ordinary shares in issue, assuming half of the preference share capital is converted to ordinary shares as seems highly likely, this will be offset by the improvement in capital structure and risk profile, and the benefit to earnings of up to £11.6m that would have been paid out on the preference dividend on the 97m preference shares being cancelled.
Likely boost to Raven Russia ordinary shares
It also seems highly likely that Raven Russia will become a live candidate for promotion from the FTSE Small Cap index to the mid-cap FTSE 250 index at the March quarterly review of the FTSE International Index Committee. That’s because Raven Russia’s issued ordinary share capital will rise from 558m to 753m shares once the preference share conversion offer goes through. Investec owns almost 100m of the 194m preference shares in issue and has stated it will convert half of its holding to ordinaries as it is entitled to.
In addition, Anton Bilton, deputy chairman of Raven Russia and certain of his associates who are preference shareholders, and who together have an aggregate beneficial interest in 28m preference shares, representing approximately 14.4 per cent of the preference shares in issue, have each irrevocably undertaken to convert their respective entitlements pursuant to the preference share conversion offer. In other words, 65 per cent of the preference shareholders have already agreed to convert ahead of the general meeting on Monday, 23 December, while institutional shareholders representing 24.5 per cent of the ordinary share capital have indicated they will vote in favour at the general meeting to approve the transaction.
This makes it a dead cert that the conversion will take place and that Raven Russia’s ordinary share capital will rise to 753m shares on Thursday, 2 January. In turn, its market value would rise to over £600m, placing it as the 332nd largest company on the London main market by market capitalisation.
That’s important because in order to gain automatic promotion from the FTSE SmallCap to the FTSE 250 index in March, Raven Russia would need to be ranked 325 or above at the time. That position is currently held by Bankers Investment Trust (BNKR) which has a market capitalisation of £646m. In other words, Raven Russia's share price would only have to rise by a further 6 per cent from 80p to 86p, all things being equal, for the company to automatically go into the FTSE 250 at the March review. And as tracker funds and hedge funds following the index changes become aware that this is a live possibility, expect increased buying in Raven Russia shares by momentum and mid-cap index tracker funds.
It’s also worth noting that by converting the preference shares to ordinaries, Raven Russia will no longer need to hold such high reserves of cash ($181m or 14.2p per share pro forma according to analysts at Equity Development) to cover the preference dividend, so freeing up cash for further investment.
The bottom line is that Raven Russia’s share price could get a boost from technical buying in the months ahead. It would be a move well underpinned by the strong fundamental case to invest which I have been making all year. Needless to say I continue to rate the ordinary shares a buy, and would also recommend that you convert half your preference shares into ordinaries too.
Please note that I have written three columns today, all of which are on my home page. Also, I will update the investment case of WH Ireland (WHI) after the company issues its pre-close trading update on Thursday, 19 December.
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.
MORE FROM SIMON THOMPSON ONLINE...
Since the start of December I have published the following articles on companies or trading strategies:
■ PV Crystalox Solar ('Cash rich and undervalued', 2 Dec 2013)
■ Pilat Media Global ('Bumper upgrades for software maestro', 2 Dec 2013)
■ Housing market ('Allaying fears of housing myths', 3 Dec 2013)
■ Dragon Ukrainian Properties ('Ukrainian nightmare tames the dragon', 4 Dec 2013)
■ Conygar ('A smart regional property play', 4 Dec 2013)
■ Sutton Harbour ('Small cap value plays', 5 Dec 2013)
■ Crystal Amber ('Small cap value plays', 5 Dec 2013)
■ API ('Small cap value plays', 5 Dec 2013)
■ Greenko ('Fair wind', 6 Dec 2013)
■ Bezant Resources ('High risk, high reward resource play', 9 Dec 2013)
■ Thorntons ('A rating too sweet?', 10 Dec 2013)
■ KBC Advanced Technologies ('Fuelled for more growth', 11 December 2013)
■ Terrace Hill (‘Property play fully valued’, 13 December 2013)
■ Moss Bros (‘Dressed for success, 16 December 2013)
■ Inland, Terrace Hill, Daejan, Raven Russia, Mountview, Town Centre Securities, Bellway, Jarvis Securities, Air Partner, Thalassa, Pilat Media Global, NetPlay TV, 32Red ('Seeking safety and income at a reasonable price', 17 December 2013)
