A property stock at a near-50% discount

Investors are taking an incredibly conservative view with their valuation of Aim-traded property development and investment group Conygar (CIC:106p).

The shares trade on half book value even though Conygar is making solid progress with developing its flagship 36-acre The Island Quarter site in Nottingham. The group has detailed planning permission for two hotels, 247 build-to-rent (BTR) apartments, 30,000 square feet (sq ft) of co-working space and a 249,000 sq ft bioscience building.

Factoring in the ongoing construction work on a 693-bed purpose-built student accommodation (PBSA) scheme and the planning approval for the bioscience building, the site has been revalued at £107.7mn (181p per share) by surveyors at Knight Frank, up from £93mn at the 2022 financial year-end. It’s also worth noting that the recent real estate market movements have not materially changed the overall valuation.

That’s because, while price inflation and interest rate rises have had a negative impact on property construction costs and valuation yields, these adjustments are being cushioned by rental growth, particularly within the residential BTR, PBSA and bioscience sectors. The three sectors account for over 85 per cent of the gross development value of The Island Quarter site.

Despite the challenges faced by residential buyers due to the cost of living crisis and mortgage rate increases, the acute supply and demand imbalance supports high levels of demand, and rent inflation growth, in the property rental market for which investor appetite remains strong. Furthermore, the ongoing expansion in the UK’s student population, record levels of occupancy and the acute shortage of available multioccupancy accommodation continue to drive strong rental growth and investor returns within the PBSA sector.

In addition, an over-reliance on overseas providers, recent supply chain shortages and limited laboratory space in the UK highlight the need for significant investment in the bioscience sector. In March 2023, the UK government announced over £370mn in new funding plans to cement the UK’s place as a science and technology superpower by 2030.

Funding the development

Importantly, Conygar has the funding in place to complete the PBSA scheme ahead of the 2024 academic year, having secured a £47.5mn development facility with Barclays Bank in December 2022. Projected gross rental income equates to a near-10 per cent yield on the £59mn build cost, highlighting the potential for a £30mn (50p a share) upwards valuation when the scheme completes in 12 months’ time.

Moreover, the directors are in the process of raising £20mn through the placing of zero-dividend preference shares to fund the detailed designs and applications for the next phases of The Island Quarter. These include a further 400-bed PBSA and applications for between 1,500 and 2,000 BTR apartments. True, investor appetite has not been sufficient to hit the original £30mn target, but management confirms that investor interest is still strong. At the half-year end, Conygar was debt-free and retained cash of £13.3mn, as well as holding property assets worth £7.9mn in Wales, all of which have capital upside potential.

So, although the shares are one of the laggards in my 2022 Bargain Shares Portfolio, I strongly feel that the near-50 per cent share price discount to book value is wholly unwarranted given the likelihood of Conygar realising material valuation gains at its Nottingham flagship site. Buy.

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