Bargain basement property play

Far more informative are the pro-forma figures, which reveal that half-year reported pre-tax profit rose by 8 per cent to £3m on revenue up 10 per cent to £8m, effectively accounting for half of house broker Arden Partners’ full-year pre-tax profit estimate of £6.2m. Also, net asset value (NAV) per share has risen from 57.5p in March 2019 to 59.65p by 30 September 2019, and Arden upgraded its March 2020 NAV per share from 60.5p to 62.3p post results, implying the shares trade on a thumping 36 per cent forward discount to NAV per share. There is not just value in the shares from a balance-sheet perspective as analysts also expect the annual dividend to edge up to 1.7p a share, a payout covered 2.7 times by forecast earnings per share (EPS) of 4.6p, implying a prospective dividend yield of 4.3 per cent.

Admittedly, and in the words of chief executive Ben Habib, the results were "boring", but there could be some excitement for investors in the coming months. That’s because Mr Habib revealed during our results call on 21 November that the board is “aggressively looking at making acquisitions [of high-yielding property] in Poland” to deploy some of the £8.5m free cash on First Property’s balance sheet. In fact, Mr Habib hopes to conclude a €25m (£21.6m) purchase of an office block in Poland within the next three months.

The company directly owns nine commercial properties in Poland and Romania, the largest of which is a half share in the CH8 Tower in Warsaw, accounting for €40m of the portfolio’s market valuation of £96m. Investment bank Citi had occupied half the 20,000 square metre of office space until vacating the premises in February 2018. The company then carried out a refurbishment of the property to attract new tenants, and successfully so, as 80 per cent is now leased out, up from 60 per cent at this stage last year. Moreover, management is in negotiations with prospective tenants to lease the remaining vacant space. Once fully let, CH8 Tower will bring in net operating income (NOI) of €3.2m, up from €1.3m currently.

First Property’s management is also in talks with Asseco Poland SA, one of the largest technology companies quoted on the Warsaw Stock Exchange, over taking half the space in the over-rented Prokom building, which First Property purchased in Gdnyia. Asseco has occupied the whole building since it was first built in 2005 and its current lease expires in October 2020. Mr Habib believes that fully let the building will generate NOI of €2.5m, thus underpinning the €30m book value of the asset.

Value proposition

It’s worth pointing out that the deconsolidation process deleveraged First Property’s balance sheet, and gross borrowings of £67.5m now only equate to 50 per cent of the combined £135m value of directly-held property (£96.3m), investments in 10 of the 13 funds it manages and associates (£30.3m), and cash on the balance sheet (£8.5m). The nine properties earn NOI of £9.6m, implying an annualised yield of 10 per cent on market value, and one that is significantly higher than the 1.84 per cent average annual interest charged on non-recourse borrowings secured on the assets. Effectively, there is an accretive NAV per share mechanism built in from the net profits generated by these properties.

Moreover, the asset management side continues to perform well. In the latest six-month period, divisional pre-tax profits (pre-central overheads) increased by 25 per cent to £1m on 11 per cent higher revenue of £2m. A £6m disposal of one property was the main reason why third-party assets under management (AUM) dipped slightly to £602m, of which two-thirds is held in five UK commercial property funds, 31.7 per cent in five funds invested in Poland, and 1.5 per cent in two Romanian property funds.

The hidden value in the fund management business, and the £30m interest First Property has in associates and funds it manages, are effectively in the price for free given that the £29m equity held in the nine directly-owned properties and £8.5m cash on the balance sheet back up 86 per cent of the company’s £43.5m market capitalisation. That’s an incredibly harsh rating given First Property’s enviable track record of valuation creation since I included the shares, at 18.5p, in my 2011 Bargain Shares Portfolio. Adjusted NAV has quadrupled to £66m without recourse to any equity fundraising in the same period, and the board has also paid out cash dividends of close to £13m, or 11.66p a share.

Trading on a 36 per cent discount to end-March 2020 NAV estimates, offering a prospective dividend yield of 4.3 per cent and priced on less than nine times forecast EPS estimates, First Property’s shares are back in bargain basement territory. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK]. Postage and packaging is only £3.95 for purchases of both books.

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