Summit Germany (SMTG) has been around for some time, but only floated on Aim in February last year, at 63¢. Focused on acquiring offices, mostly in Berlin, its progress since flotation has been extremely impressive with net asset value per share rising by 24 per cent in 2014 and rental income climbing 10 per cent. Meanwhile, a spate of canny deal making, including some smart refinancing moves, was reflected in a tripling of pre-tax profit.
- Shares trade at a discount to forecast NAV
- Attractive dividend yield
- Big savings on debt refinancing
- Rising rental income
- Exposure to possible euro weakness
- Earnings diluted by share placing
The company hit the ground running when it floated using the €35m (£25.2m) raised at IPO to help finance the €46m purchase of a loan that was in breach of covenants. The deal gave Summit control of 11 properties that delivered it a €28m valuation uplift last year. And the occupancy rates on the 90,000 square metres of acquired floorspace was boosted from 70 per cent to 85 per cent. The one-off impact this deal had on profits explains the dip in forecast profits for 2015 seen in our table.
Summit's longer-term growth profile also looks attractive. There is currently a €250m pipeline of potential acquisitions, and demand for quality office space in Germany is growing fast. The eurozone as a whole may be just plodding along, but economic activity in Germany is much stronger. Occupancy rates rose on the whole portfolio from 87 per cent at flotation to 92 per cent last December (including expected lease agreements), and managing director Zohar Levy reckons this could be pushed up to around 96 per cent.
Where Summit has also really scored is in the swift and effective way it has refinanced its debt structure, which should benefit 2015 results. Last December the group replaced its main €268m credit facility with Royal Bank of Scotland with a new seven-year €240m loan with two German banks at 3.14 per cent. The rate on the new loan is 76 basis points lower and will improve cash flow by around €1.8m a year. It also releases the company from making annual debt repayments that were attached to the RBS facility. In another sensible move earlier this year, the company exercised an option for early repayment of a €50m parent company loan with a 9.5 per cent coupon rate, which is expected to result in a further cost saving of €4.75m. Further savings will come from the expiry of legacy swaps in the final quarter of 2014, which are expected to save the company €7m in interest expenses.
| SUMMIT GERMANY (SMTG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 90.5¢ | MARKET VALUE: | €421m | |
| TOUCH: | 90-91¢ | 12-MONTH HIGH: | 91¢ | LOW: 54.4¢ |
| FORWARD DIVIDEND YIELD: | 4.9% | TRADING PROPERTIES: | €1.8m | |
| DISCOUNT TO FORWARD NAV: | 4% | |||
| INVESTMENT PROPERTIES | €583m | NET DEBT: | 106% | |
| Year to 31 Dec | Net asset value (¢)* | Pre-tax profit (€m) | Earnings per share (¢)* | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 70.0 | 23.9 | 3.3 | - |
| 2014 | 86.9 | 74.0 | 4.8 | 2.85 |
| 2015* | 87.5 | 53.0 | 5.3 | 3.74 |
| 2016* | 94.0 | 56.5 | 5.5 | 4.4 |
| % change | +7 | +7 | +4 | +18 |
Normal market size: 3,000 Matched bargain trading Beta: 0.33 *Cenkos forecasts, adjusted NAV and EPS | ||||
The money to help sort out Summit's borrowings came from a recent oversubscribed share placing to raise €120m at 70¢ a share. Gearing on a loan-to-value basis has come down from 56 per cent at flotation to 46 per cent, and the company has around €90m available to make further acquisitions. Crucially, the 95 properties within the portfolio are delivering a rental yield of 8.1 per cent, far in excess of the borrowing rate on debt.
The solid rise in rental income last year from €39.5m to €43.5m is set to grow further because it does not reflect the full potential income from acquisitions made during the year. On an annualised like-for-like basis Summit reckons this would equate to €47.1m. And including lease agreements in an advanced stage of negotiation, this rises to €47.7m. This should support the attractive forecast dividend.
