Bargain Shares: Targeting value plays

A strong recovery in investor confidence following last year’s Covid-19 induced market softness, coupled with an undersupply of housing are highly supportive of institutional demand in both sub-sectors. International students heading to UK universities have bounced back, too, while anyone trying to rent a flat in the private sector will have seen rents surge in the past year.

This is good news for property company Conygar (CIC: 157p) which is looking to start construction work early next year on a 702-bed student accommodation scheme on one acre of its 36-acre Island Quarter site in Nottingham, a city with a large student population desperately in need of housing. Based on market rents the scheme could generate a rent roll of £5.7m and be worth £90m at current PBSA yields when it completes in September 2023. Construction costs of £54m will be debt funded.

Amended planning approval should also be granted by the year-end for the project's next phase, a 223-bedroom hotel to be managed by InterContinental Hotels, 247 residential apartments and 3,000 sq metres of flexible office space.

Conygar’s hidden value

• NAV surges 28 per cent to £114m (217p a share)
• Discussions ongoing for joint venture/debt funding for major phase of Nottingham site
• Crosshands retail warehouse to be marketed in January
• Sale of Selly Oak site likely to complete by year-end

Conygar’s annual results revealed only part of the profit potential from its flagship Nottingham site which was revalued upwards by two-thirds to £70.5m by surveyors at Knight Frank.

However, that is less than £2m per acre, or half the £4m per acre paid by the University of Nottingham for a 9-acre city centre office site which is currently used by HMRC and will become a new campus. In addition, the Nottingham residential housing market has been flying, so much so that the Conygar is unlikely to be short of funders for the first phase of 247 BTR flats, a fraction of the potential 3,500 flats that could ultimately be built, subject to planning approval.

Importantly, Conygar is in a strong financial position. Net cash of £13.7m (26p a share) will be boosted by £7m from the sale of an industrial property in Selly Oak, Birmingham, to a well-known listed student accommodation provider, and its Cross Hands retail park in Carmarthenshire (book value of £17.7m) will be marketed for sale in January. It should be easy to offload given that the retail warehousing market is recovering strongly.

Keep an eye on the UK Government’s mini-nuclear power station strategy, too, as Conygar’s strategic land holdings in Anglesey could become very valuable. Also, key infrastructure is set to be completed in the coming weeks at Conygar’s Haverfordwest site (book value £8.6m), thus enabling the sale of 729 plots of residential land.

The shares are up 29 per cent since the interim results (‘Opportunities in property’, 26 May 2021) and are back to where I suggested buying at in my 2018 Bargain Shares portfolio. The upside from here could be material. Buy.

Record reaps benefits of high margin growth

• First half pre-tax profit doubles to £5.15m on 38 per cent higher revenue of £16.3m
• Assets under management equivalent (AUMe) increases 5 per cent to $84.1bn in six months to 30 September 2021
• Interim dividend hiked from 1.15p to 1.8p a share

Shareholders in currency manager Record (REC: 78p) are now reaping material benefits from the change of leadership at the start of last year.

Chief executive and 7.6 per cent shareholder Leslie Hill has diversified Record’s product mix into higher margin and more scalable products by focusing on client led development opportunities. Effectively, the company is acting as currency manager to asset managers.

For instance, having launched a market-first Dublin-based emerging market sustainable finance fund in a strategic partnership with client UBS in late June, the mandate had pulled in $750m of AUMe by the end of September, and a further $450m since then including a chunky $320m inflow a couple of weeks ago. House broker Panmure Gordon had only factored in $200m of net flows and a revenue contribution of less than £0.3m in its 2021/22 forecasts less than six months ago (‘Upgrading target prices’, 22 June 2021).

Moreover, Record’s total current Frontier and emerging market currency portfolio stands at $3.75bn and interest in the area is growing as Record starts to engage with other clients who need help with innovative solutions for both debt and currency.

The group’s European business, particularly in Germany, commenced its first material German Dynamic Hedging mandate in the summer, too. It’s worth $400m. Based in Frankfurt, Head of Sales Dr Jan Witte is spearheading these efforts, supported by a growing European team in Zurich, Amsterdam and Frankfurt.

In addition, Hill expects to launch a Luxembourg based Municipal Loan Fund with Universal Investment as fund manager by March 2022, thus combining European Municipal Loans managed by Record’s Fixed Income and Derivatives teams with European trade receivables provided by collaboration partners Siegfried and VTeam. It’s a smart move and one that will expand Record’s range of products while at the same time enhance scalability and diversification of revenue streams. Although Panmure has pencilled in an initial $100m contribution to AUMe, Hill notes that that the product is “eminently scalable, even more so than the one with UBS, and has better fees than hedging products.”

Importantly, the move to higher revenue and higher margin dynamic, currency for return and multi-product mandates is reducing Record’s reliance on low margin passive hedging mandates (36 per cent of revenue mix, down from 51 per cent in the first half of 2021). This explains why a 10-percentage point rise in operating margin to 32 per cent, coupled with 38 per cent revenue growth, resulted in both first half operating profit and pre-tax profit doubling to £5.15m. In fact, only £1.7m of the additional £4.5m of gross profit earned was used to cover additional staffing and profit share costs.

Shareholders have rightly been rewarded with a 56 per cent higher dividend per share of 1.8p, well ahead of Panmure’s 1.25p a share estimate, the pay-out being covered 1.15 times by earnings per share (EPS) of 2.08p. Record retains a cash rich and asset light balance sheet, so the board can declare a high proportion of net profits as dividends. Panmure expects the full-year dividend to be hiked from 2.8p to 4.4p, implying a current year dividend yield of 5.7 per cent.

Admittedly, Record is incurring higher short-term costs as it upgrades its staff and technology capabilities in “pursuit of a performance culture and growth agenda” says finance director Steve Cullen. This explains why Panmure pulled back its full-year EPS estimate from 5.1p to 4.4p (2021: 2.7p) based on annual pre-tax profit rising from £6.2m to £11.2m. However, it’s still bumper organic growth and with pre-tax profit forecast to rise further to £13.3m in 2022/23, analysts expect both EPS and the annual dividend to increase to 5.3p.

The holding has produced a 99 per cent total return since I included Record’s shares in my 2018 Bargain Shares portfolio, albeit the share price has drifted from the 90p level on profit taking. On a forward price/earnings (PE) ratio of 14.7 and offering a prospective dividend yield of 6.8 per cent for the 2022/23 financial year, the share price pull-back represents a repeating buying opportunity. I maintain my 120p target. Buy.

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