Aim-traded property vulture fund Conygar (CIC:165p), a constituent of my 2018 Bargain Shares Portfolio, has issued its half-year results for the six months to the end of March 2018 this morning.
I am not in the slightest way concerned by the 4.7p a share decline in net asset value (NAV) to 198.3p a share. That’s because more than half of the decline was down to marking to market value the 26.2m shares Conygar holds in Regional Reit (RGL:100p), a property company that owns a £737m portfolio of UK commercial property, predominantly office and industrial units in regional centres outside the M25 motorway. The stake was worth £25.1m on 31 March 2018, but at this morning’s share price it’s worth £25.4m, or 39.3p per Conygar share. I definitely see upside in the high-yielding holding.
Also, the company’s decision to take control of the development at Holyhead Waterfront from joint venture partner Stena Line Ports will lead to the release of half of the £5m loan Conygar made to the joint venture and Stena receiving 20 per cent of the development profits in compensation for giving up its joint share in the project. This boosts Conygar’s pro-forma cash pile to £38.2m, a sum worth 59p a share, and means that net funds and the stake in Regional Reit account for half of spot NAV of 199p a share, so assets worth 101p a share are effectively in the price for just 65p.
That valuation is really harsh. Indeed, as I pointed out in my article last week ('Bargain shares: repeat buying opportunities’, 14 May 2018), the portfolio has significant potential. A 106,000 sq ft retail development at Cross Hands, South West Wales, which is now substantially let, was revalued up from £8.1m to £9.3m in today’s announcement, and the company is finalising the lease for a new 22,000 sq ft store which will be built on completion of the legal documentation. This offers further investment upside.
In Nottingham, expect a planning application to be submitted next month for a mixed-use scheme in excess of 2m sq ft on the company’s 37-acre site in the city centre. The application will include apartments, student housing, offices, leisure uses and associated community retail offerings along with open public spaces. The site is valued in the latest accounts at £14.57m and accounts for 22 per cent of Conygar's £66m-worth of development assets.
Also, expect planning news in the coming weeks on a two-acre site at Ashby-de-la-Zouch in Leicestershire. Conygar has exchanged a lease agreement with budget retailer B&M Retail to construct a 20,000 sq ft store and an additional 7,500 sq ft garden centre, conditional on planning approval. Conygar has also agreed terms to sell this asset once the construction has completed. All the development projects are held in the accounts at cost, thus highlighting the potential to create value on successful planning applications.
In fact, in a note to clients this morning, analysts at broking house Liberum Capital note that "our NAV forecasts are driven by smaller scale projects such as Cross Hands, Parc Cybi (Holyhead), and Ashby-de-la-Zouch. There is potential for upside if progress accelerates in the large development schemes at Nottingham and Holyhead."
Ahead of planning news and announcements on development projects, I continue to rate the shares a buy, at 165p, and maintain my 190p target price based on a year-end NAV forecast of 210p a share. Buy.
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Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order
