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Raven Property for a double-digit dividend

But political and currency headwinds remain a worry
October 4, 2018

Anyone looking for a low-risk investment opportunity may as well stop reading now, because Raven Property (RAV) is currently having to face considerable political uncertainty and is exposed to extreme currency movements.

IC TIP: Buy at 39.7p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points

Very large dividend
Shares trade at a wide discount to net asset value
Solid demand for warehouse space around Moscow
New lettings

Bear points

Big political risks
High level of debt

As an owner of warehouses in and around Moscow, Raven has a thriving business blighted by a local currency in free fall. Ineed, occupancy rates at the June half year were up from 81 per cent to 87 per cent, while net operating income grew from $69.9m (£53.9m) a year earlier to $79.3m. But the political climate has really put off investors, despite the best efforts of Raven, which has also listed its shares in Johannesburg and the local Moscow exchange in the hope of finding a more appreciative audience. The currency risk is harder to cope with. The Russian rouble has been in decline for some time and, on an IFRS accounting basis, which reflects exchange rate weakness, a first-half profit of $9.2m in 2017 turned into a $41.1m loss in 2018.

A few years back, all rents were collected in US dollars, but tenants were struggled to come up with the money as the rouble fell. Now rouble-denominated leases account for 54 per cent of the total warehouse space and 46 per cent of net operating income. This is good news for the tenants but not for shareholders based outside Russia.

Business is booming, however, and Raven is planning to build around 70,000 sq metres (sqm) of warehouse space on a speculative basis at its existing Nova Riga site. At today’s construction costs and rents, this should give a 12 per cent return, although net operating income will not show the benefit until 2020. New warehouse lettings in the first half totalled 153,000 sq m, with a further 116,000 sq m renegotiated and extended. Since the half-year-end, a further 38,000 sq m of vacant space has been let as well as 23,000 sq m renegotiated.

RAVEN PROPERTY (RAV)  
ORD PRICE:39.7pMARKET VALUE:£253m
TOUCH:38.6-39.7p12-MONTH HIGH:53pLOW: 37p
FORWARD DIVIDEND YIELD:10.1%DEVELOPMENT PROPERTIES:$37m
DISCOUNT TO FORWARD NAV:27%NET DEBT:$994m 
INVESTMENT PROPERTIES:$1.54bn  
Year to 31 DecNet asset value (¢)*Recurring pre-tax profit ($m)*Earnings per share (¢)*Dividend per share (p)
     
201667.562.36.82.5
201776.573.07.44
2018*71.031.64.14
2019*70.739.14.84
% change-+24+17-
Normal market size:7,500   
     
Beta:0.44   

*N+1 Singer forecasts, adjusted NAV, PTP and EPS figures

£1=$1.30

On the financial side, there is a cash balance of $198m to fund further acquisitions, but at the half year there was also $824.3m of secured and unsecured loans, in addition to which there are $411m of preference shares in issue. All new leases and extensions are now rouble denominated, and Raven secured its first rouble-denominated debt. This will help to reduce the currency mismatch, and while interest rates are higher in Russia, average rouble rents are indexed at 6.1 per cent a year.

It comes as no surprise to see the shares trading at a significant discount to net asset value, one of the biggest in the whole sector. That’s factoring in some very bad news, and doesn’t take into account the fact that, in the absence of economic Armageddon, at some point the rouble exchange rate has to start to stabilise. Raven’s management remains sanguine, and was confident enough to propose a tender offer buy back of one in 44 shares at 55p, equating to a payment of 1.25p per ordinary share. With a total dividend payout for the whole year forecast at 4p a share, this is equal to a yield of around 10 per cent, the highest on offer in the sector.