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OPINION

New share price highs beckon

New share price highs beckon
February 10, 2014
New share price highs beckon
IC TIP: Buy at 171p

Not that the directors are taking any money off the table. In fact, Mr Ware purchased a further 20,000 shares at 154p each on 19 December to take his holding up to 3.75m shares, or 4.22 per cent of the share capital. He was not alone as executive director Preston Rabl also splashed out £308,000 acquiring 200,000 shares at the same price to take his holding to 1.35m shares, or 1.51 per cent of the shares in issue. It's not difficult to see why the directors were delving deep to make these purchases.

New funding lines for growth

Firstly, the company has pulled off a smart-looking fundraise by issuing £30m of zero dividend preference (ZDP) shares on a gross redemption yield of only 5.5 per cent. The proceeds of the placing will be used for further acquisitions of investment properties and realising value from Conygar's development projects. That's in line with the board's stated strategy of investing in property assets and companies where the company's shrewd management team can add significant value using its property management, development and transaction structuring skills.

By issuing the ZDP shares at 100p each, and based on the five-year term of the issue, the redemption value in January 2019 will be 130.7p a share. But with only a 5.5 per cent annual return needed to pay the rolled up interest on the capital, it's clear to me that there is massive potential for Conygar to create value for ordinary shareholders by redeploying this £30m into its development projects.

Clearly, the company's bankers were impressed with those plans because Conygar has just completed on a new four-year £37.2m loan with the Royal Bank of Scotland secured on 20 of its properties. The loan has a total annual interest cost of 4.3 per cent, including a margin of 3 per cent, and is structured as a £27.2m term loan with a £10m revolving facility to offer flexibility for the future. The new credit facility replaces a previous one with Lloyds Banking Group, which was secured on the same portfolio and had 12 months to expiry. As a result of these new funding lines, Conygar's total bank debt of £66.4m has an attractive weighted average cost of 4.4 per cent (including margin), with average debt maturity extended to 3.4 years. The company also now has a chunky £60m of cash on its balance sheet to fund more deals.

Significant asset backing

It's worth noting that investment properties last valued at £165m and a £32m development portfolio offer substantial asset backing for these funding lines, especially since finance costs of £3.7m in the last financial year were almost four times covered by the annual rent roll. That not only leaves extra cash for investment in the development pipeline and more opportunistic deals, but also for dividends and share buybacks. The payout was raised by a fifth to 1.5p a share last year during which time the board also used excess funds to buy back 4.3 per cent of the issued share capital at a bargain basement 96.8p a share.

That share repurchase programme made a great deal of sense given that the shares were trading on a large discount to Conygar's net asset value of 165p a share at the time. It looks even smarter now because the company's book value has increased by over 5 per cent to 175p, and that's without revaluing the development projects. Indeed, the £32m valuation of the development portfolio is very conservative because planning progress has been gathering pace in the past year, which is not reflected in the last reported net asset value as all these assets are held at cost.

Conservative valuations

In the full-year results in December, Conygar confirmed that after a long consultation period with Pembrokeshire County Council, the company 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 in the accounts at £15.3m, which means each plot is in the books for only £15,000, a valuation that is well below open market prices. The story gets even better because Conygar has easily covered all the infrastructure and services costs through the net proceeds generated from a supermarket land deal with Sainsbury's. This significantly de-risks the residential development.

Moreover, it's my opinion that the true market value of these residential plots at Haverfordwest could easily be above £30m. That's a significant sum considering Conygar is only valued at £165m. Or put it another way, if the plots at Haverfordwest were marked to market value, I believe this would add at least 10 per cent, or around 17p a share, to the company's conservative book value in its accounts.

There is development upside in Conygar's six other development projects, too, which are in the books at £16.9m. The largest is the Holyhead waterfront development in Anglesey, Wales, which has a carrying value of £9.3m. That looks on the low side given that Isle of Anglesey County Council has now granted planning permission to Conygar's joint venture with Stena Line Ports Limited for its mixed-use marina development covering half a mile of waterfront. 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 in a prime location overlooking the marina.

Other potentially profitable waterfront developments are at Pembroke Dock and Fishguard. And with £60m of cash on its balance sheet, and credit lines in place too, the company is clearly very well funded to be able to bring on these developments

Regional property play

It's worth flagging up that Conygar also offers a low-cost option on the recovery in the provincial property market and one where embryonic signs are starting to come through. If this continues it could have a major positive impact on the company's net asset value. That's because Conygar owns a mix of business parks, office, industrial and retail properties located in a variety of locations, including Birmingham, Wolverhampton, Dundee, Aberdeen, Lincoln, Northampton and Stafford.

To put the potential valuation upside into some perspective, the regional investment portfolio generates an annual rent roll of £14.4m and was last valued at £165m, so a near 9 per cent yield is not only attractive, but it means that every 0.5 percentage contraction in equivalent yield would produce a valuation uplift of 6.3 per cent.

True, the average unexpired lease on these properties is only 4.8 years and the vacancy rate is around 16.7 per cent, which is high. But I understand several lease negotiations are ongoing on vacant premises which should reduce voids. And credit quality is not an issue with between 95 to 97 per cent of rents collected within 10 days of the quarter-end.

So, the combination of regional recovery potential, development upside, firepower to take advantage of any opportunistic property deals and a conservative accounting policy means that Conygar's valuation is well underpinned. In fact, having reassessed the potential upside I am very comfortable reiterating my buy advice with the shares trading on a bid-offer spread of 170p to 171p. My new fair target price range is 190p to 195p. Buy.