Insiders buying on solid foundations

It’s a company that’s been on my radar for the past three years, having first recommended buying the shares at 131p ('Shrewd insider buying at property play', 30 Sep 2013), seen the price hit a seven-year high of 195p in March last year, and last rated them a buy at 172p at the start of this year (‘Hot property’, 7 Jan 2016). Admittedly, the share price has sold off this year, but clearly the insiders feel it’s gone too far as Mr Ware has just purchased 100,000 shares at 133.5p each, executive director Preston Rabl topped up his holding by splashing out £53,920 purchasing 40,000 shares at a price of 134.8p, and not to be outdone chairman Nigel Hamway got in on the act and spent over £100,000 purchasing 80,000 shares at the same price. There are sound reasons to believe that these purchases are well timed.

Debt refinancing frees up cash

Firstly, as I alluded at the start of this article, Conygar has refinanced its bank debt facilities to free up a further £21m of cash for acquisitions and to reduce the cost of funding. In fact, the company has reduced its weighted average cost of debt on its £48.1m of borrowings from 3.9 per cent to 2.4 per cent and extended the average debt maturity from 13 months to 4.3 years. These credit lines exclude 30m zero dividend preference shares that were issued at par of 100p in January 2014 and which redeem at 130.7p each in January 2019, implying an annual cost of capital of 5.5 per cent per annum during the five-year period. The outstanding value of these zeros was £33.4m at Conygar’s interim balance sheet date of 31 March 2016.

This means that Conygar now has free cash of £62.7m on its balance sheet to offset gross borrowings of £89.9m to give proforma net debt of £27.2m, implying 17.5 per cent balance sheet gearing on shareholders funds and a loan-to-value ratio of 21 per cent on its £126.7m investment portfolio. And because the 33 commercial properties held in Conygar’s investment portfolio generated contracted annual rent of £9.2m at the end of March, this means that rental income covers the interest charge on the borrowings more than four times over. The key point here is that with Conygar’s shares trading 30 per cent below spot net asset value of 200p, then the company’s market value of £108m is little more than the value of its investment portfolio worth £126.7m less net debt of £27.2m secured on those assets.

True, Conygar’s investment portfolio had a 17 per cent vacancy rate at the end of March 2016, and a relatively short average unexpired lease length of 4.7 years. However, voids have been skewed by £3m worth of refurbishments of properties in Hampshire and Warrington, which will complete this summer, and exclude the subsequent letting of 60,000 sq ft and 3.2 acres of open storage land at its site in Colwyn Bay, North Wales to Colwyn County Council at an initial rent of £240,000 on a 35-year lease.

If you take these factors into account the vacancy rate halves to 8.6 per cent, and contracted rents rise to nearer £9.5m. That’s still below estimated rental value (ERV) of £11.5m, highlighting the potential to add value to the investment portfolio. I also believe the equivalent yield of 8.16 per cent used by independent chartered surveyors Jones Lang LaSalle to value Conygar’s investment property portfolio at £126.7m at the end of March this year was a fair representation of the yields achievable on the type of property held (mainly business park, office and industrial assets). That’s solid asset backing and leaves a development portfolio with a carrying value of £46.2m, or 60p a share, and one valued at the lower of cost and net realisable value, in the share price for free.

Conygar's balance sheet post debt refinancing

Significant value in development portfolio

Bearing this in mind, the company is making decent progress on its flagship development at Haverfordwest, Pembrokeshire. The substantial infrastructure works to support the development of 729 residential units and a seven hectare retail site have been completed on budget at a cost of £3.9m and marketing of the housing land is currently being undertaken, albeit later than I had previously envisaged.

Furthermore, Conygar has submitted two planning applications for the development of the seven hectare retail site at Haverfordwest which it bought back from Sainsburys last year for a knock down price of £3m. The company originally sold the site to Sainsburys for £13.75m in 2014 when the site had planning permission for a 95,000 sq ft retail superstore and associated petrol station. Conygar’s new planning applications propose a retail-led mixed-use development (including 10 retail units and a 60-bed hotel) and a cinema and restaurant development (five-screen cinema and five new restaurants). The planning decision from Pembrokeshire County Council is expected later this year and, if successful, work is expected to commence on the site in early 2017.

The key here is that the 93-acre site at Haverfordwest is held in Conygar’s accounts at £23.1m after accounting for the £3.9m infrastructure works undertaken, but excluding the £3m it spent buying back the retail site. In other words the ‘oven-ready’ residential land is in the books for little over £31,000 per plot, significantly less than the £40,000-plus value which analysts believe should be achievable. And if the commercial development on the site gets planning permission, then the £3m Conygar paid Sainsbury’s to buy back the land is likely to prove a shrewd business move too.

The largest of Conygar’s other major development projects is its Holyhead waterfront development in Anglesey, Wales, which is in valued in the company’s books at cost of £10.25m. Conygar's interest in the site is held through a joint venture partnership with Stena Line Ports Limited for a mixed-use marina development scheme including: 324 apartments and townhouses; a 500-berth marina; 43,370 sq ft of marine-related retail, leisure, restaurants, hotel and office space, within a flexible design and in a prime location overlooking the marina. The company also has some potentially profitable waterfront developments at Pembroke Dock and Fishguard which are in the books at £4.7m and £1.6m, respectively.

There is significant potential upside in Conygar’s 9.96 acre development site in Cross Hands, west of Swansea, which is held in its books at £2.55m. The company has submitted a planning application to Carmarthenshire Council, having acquired the fully serviced site from Sainsbury's in October 2015 with consent for a 90,000 sq ft store. The new planning application is for a 106,000 sq ft retail development which would include: a 562-space car park; a family pub/restaurant; a high-end food store; a stand-alone discount food store; a frozen food specialist; a drive-through restaurant; and other retail stores. If planning consent is received this summer, construction should commence later in the year and will be funded from Conygar's existing cash resources. I understand the company is in “detailed discussions with various potential tenants”.

Expect newflow on planning applications on several other developments this year too including a proposal for a 11,000 sq ft Marks and Spencer’s Food Hall in Ashby-de-la-Zouch, Derbyshire. There is also an adjoining 2-acre plot on the site.

Arriving at a fair valuation

The main upside for shareholders will come from a mixture of opportunistic property purchases to deploy the £62m cash pile and value added through the conservatively valued development projects. Interestingly, in the half year results, Mr Ware pointed out that “historically we have performed strongly in difficult markets and following the recent refinancing of a large portion of the investment property portfolio, we are well positioned to take advantage of opportunities, should they arise." That makes the director share purchases intriguing to say the least.

Also, in the past the company has used surplus funds on its balance sheet to make net asset value-accretive share purchases. In the first half of the current financial year the board repurchased 5.3m shares at an average of 167p each, representing 6.4 per cent of the issued share capital, to enhance net asset value per share by 2.5p. Given Conygar’s current share price is 30 per cent below net asset value, it’s only reasonable to assume that further purchases will be made. Shareholders have also received a final dividend of 1.75p a share for the past couple of years.

The bottom line is that Conygar's shares look seriously undervalued even before factoring in likely positive news from Haverfordwest in the coming months, and the potential for value accretive acquisitions to be made by deploying that bumper cash pile. On a bid-offer spread of 136p to 140p, I rate Conygar shares a value buy and have an initial target price of 180p.