Bargain Shares: On the property beat

Aim-traded property development and investment group Conygar (CIC: 121p) is making decent progress developing its flagship 36-acre Island Quarter site in Nottingham. The site has been revalued at £93mn by surveyors at Knight Frank, up from £70.5mn at the 2021 financial year-end, the latest valuation equates to £2.5mn per acre and factors in the project’s development in the past 12 months.

A food, beverage and events venue at Canal Turn opened to the public in mid-September, and earlier this year Conygar was granted full planning permission on an adjacent plot for two hotels to be managed by Intercontinental Hotels Group, 247 build-to-rent apartments, a food and beverage offering and co-working space. The group is also finalising a detailed planning application, and progressing discussions with a potential funding partner, for 190,000 square feet (sq ft) of bioscience space. Located adjacent to an existing bioscience hub, the building will include both laboratory and office space, as well as conference facilities and car parking.

In addition, construction work has commenced on a 693-bed purpose-built student accommodation (PBSA) scheme on one acre of the site, targeting completion in the summer of 2024. Conygar has been using its own cash to fund The Island Quarter project to date, but has a letter of intent that supports funding commitments of £31.2mn to the PBSA scheme contractor whilst debt financing arrangements are put in place. Build cost of around £59mn equates to two-thirds of the PBSA scheme’s projected valuation on completion, and gross rental income of £5.7mn equates to a near 10 per cent yield on build cost so there should be no problem with debt servicing. Conygar is debt free and retains £17.4mn (29.1p a share) of cash, so is in a comfortable position.

Furthermore, the directors are in discussions for the possible sale of the whole site at Haverfordwest which has outline planning consent for 729 homes and 90,000 square feet of retail space. Associated site infrastructure is already in place. The property is in the books for £9.3mn (15.6p), so could realise a decent chunk of cash to recycle into the Nottingham project. Expect further announcements later this year.

It’s worth pointing out that Conygar retains potentially valuable plots of land at Rhosgoch and Parc Cybi on Anglesey which have a combined carrying value of £2.9mn. The group realised a profit of £0.2mn selling 2.4 acres of land for £0.3mn at Parc Cybi during the financial year, and despite interest from the renewable sector management is retaining the land to see whether the UK and Welsh Governments commit to energy projects on Anglesey. Shareholders can also expect news early in 2023 on the planning application for a 250-berth marina, 259 apartments and homes, and commercial and retail space at Conygar’s site at Holyhead Waterfront. That site is in the books for £5mn.

Of course, the investment backdrop has materially changed this year as the upward shift in government bond yields impacts funding property development projects as well as the level of yield required to make them viable financial propositions. However, by realising £25.3mn from the well-timed sale of industrial units in Birmingham and the Cross Hands retail park, Carmarthenshire, as well as raising £10.5mn from a placing of shares at the end of 2021, Conygar is in a relatively strong financial position when entering discussions with funding partners. As noted earlier, it has some decent assets that could be offloaded, too.

So, although the shares are the laggard in my market beating 2022 Bargain Shares Portfolio, slicing three percentage points off the portfolio’s performance, I strongly feel that the 42 per cent share price discount to net asset value fails to reflect the upside potential for The Island Quarter. For instance, the potential valuation uplift from the PBSA scheme on completion could easily equate to 40 per cent of Conygar’s current market capitalisation of £72mn. Buy.

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