Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
What a load of rubbish. You will be no better off either way over the long run, to suggest otherwise just suggests a lack of understanding about how financial markets work. When a company pays a dividend the share price drops by that amount, ceterus paribus, because the company is giving away a chunk of its capital so it is worth less. If a stock recovers the dividend quickly thereafter it is because of other market factors at play such as wider macro sentiment and sector specifics. You may well have observed Bdev recovering its dividend quickly over the past couple of years, but this has absolutely no bearing what so ever on what will happen in the future. To even suggest so is very naive and suggests a severe lack of understanding about financial markets and company valuations. Wider market factor will decide where Bdev and the sector moves after ex div, not your empirical observations based over a trivial time frame. You cannot beat the market using historical data over the long run, which is what you are trying to do- a mugs game.
I agree this is now overdue a bounce- in terms of fundamental analysis this is best value in the sector only second to TEF. Should be at least 10% higher given the current sector valuations for peers.
For good measure, LSR’s share price appears to have successfully retested the July price lows around 24p, suggesting that the sell-off from the March highs around 31p is complete and a recovery could be on the cards. I am willing to bet on that possibility and with the shares trading on a bid-offer spread of 26p to 26.5p, I rate them a value buy and have an end 2017 target price of 36p. Buy.
osts of investment manager When LSR adopted the new investment mandate three years ago, the board appointed INTERNOS Global Investors to manage the disposal programme and Steve Faber, an employee of INTERNOS, was appointed as designated investment manager and a main board director too. Mr Faber has extensive experience of UK property including at Tesco Stores, Land Securities Trillium and at RREEF where he was head of UK Asset Management and responsible for £2bn of property. Under the management agreement, LSR agreed to grant INTERNOS the following fees: an annual asset management fee of 0.70 per cent of the company’s gross asset value; an annual performance fee comprising 20 per cent of recurring operating profits each financial year above an annually agreed hurdle, rebased quarterly downwards on a pro rata basis to reflect sales; a sales fee payable on the disposal of assets, subject to a ratcheted scale being nil for less than £50m, 0.5 per cent for £50-150m and one per cent for £150m or greater of aggregate sales; and a terminal fee, calculated as 5.7 per cent of any cash returned to the company's shareholders above the "Terminal Fee Hurdle". The Terminal Fee Hurdle is calculated at the first 36.1p per share in cash returned to shareholders from the start of the scheme and this sum rises by 8 per cent annually after the first year. The fee structure was designed to reduce the basic administration cost of the company by £600,000 per annum, while at the same time incentivising INTERNOS to sell assets whilst maximising returns to shareholders. INTERNOS earned around £500,000 in fees in the six months to end March 2016, which seems a fair arrangement to me, but it’s worth flagging up the disposal costs nonetheless. Valuation LSR is a small cap property company so one would expect some liquidity discount to be applied to the valuation, but a 40 per cent share price discount to end March 2016 net asset value seems excessive considering its investment advisers are still working towards a realisation of the portfolio by the end of next year with a view to returning cash to shareholders as soon as possible thereafter. Even taking a bear case scenario whereby 10 per cent of the current portfolio value is accounted for in costs and discounts to sell the properties, and that really would be a bearish outcome, I still arrive at a realistic liquidation value of £30m, or 36p a share, after deducting the HSBC borrowings and after factoring in retained net profits earned by LSR between March 2016 and end 2017. To put my liquidation value into some perspective, it’s a hefty 35 per cent above the current share price. And given this could be earned in the next 18 months, it’s a favourable return too. For good measure, LSR’s share price appears to have successfully retested the July price lows around 24p, suggesting that the sell-off from the March highs around 31p is
It’s worth pointing out too that the board has not set a prescriptive timetable for the sale of the properties, but has instructed and incentivised its managers to dispose of properties as expeditiously as is consistent with the protection of value in order to maximise the monies paid to the shareholders. They are also instructed to ensure an orderly phasing of property sales to protect value and not over-supply this specialist property market at any one time. A corporate transaction, such as a sale of the company, will be considered, where this offers the opportunity to accelerate the realisation of optimal value for shareholders. Still, there is no guarantee that the company will be able to achieve the full £76.7m market value of the portfolio when the remaining properties are sold, nor is there a guarantee that the end 2017 deadline will be hit. High property yields warranted Another reason for the high property yields on offer is because investment returns from retail property have lagged the other main property investment sectors, with rental and yield performance weaker than office and industrial markets. Investors are still exercising a degree of caution towards a sector which has experienced a structural adjustment arising from the impact of online shopping, which has led to a rebasing of rents to more affordable levels. Well publicised concerns regarding excess space capacity amongst supermarket operators may have tainted investor attitudes too. That’s not to say the company hasn’t been successful in its lettings. By adopting a flexible approach to lease renewals and a sensible active asset management approach, LSR has managed to reduce voids in the portfolio from 13.18 per cent to 10.78 per cent in the 12 months to end March 2016. LSR’s advisors have also adopted a flexible approach when signing new leases by offering stepped rent increases whereby the initial rent is below the market rent for the first few years, but above it for the remainder of the lease term. This secures a tenant, brings in income and reduces voids on the portfolio. Tenant default is another issue worth considering for any property company. In the case of LSR, it holds deposits equating to 24.2 per cent of its quarterly rent roll, and further deposits, typically one month’s rent, are held by its managing agent and regulated tenant deposits schemes in respect of residential tenancies. This provides some protection in the event of a tenant defaulting on its rent, but it still has an impact on rental income, levels of voids and the ability of LSR to sell a property. Still, this doesn’t appear to be a problem as LSR’s bad debt charge was around £250,000 in its last financial year.
I would also flag up that having cancelled interest rate hedging facilities in January this year, and previously renegotiated the terms of the HSBC facility, bank debt is floating at a margin of 2 per cent above three-month LIBOR, implying a current interest rate of 2.39 per cent and an annual service cost of £1.3m on the credit facility. This means that once you factor in annual property expenses of around £2m, administrative expenses of £1.7m, interest costs of £1.3m, then LSR’s £7.1m of rental income produces net profits of £2.1m. Based on 82.5m shares in issue after deducting 9.16m shares held in treasury, this translates into recurring EPS of 2.6p and means the shares are being rated on 10 times earnings. Or put it another way, the net profits accrued from the portfolio between now and the targeted wind up date of end 2017 should be accretive to net asset value per share. That’s worth considering because LSR’s net asset value was £35.3m at the end of March 2016, or 43p a share, so with a market cap of only £21.8m its shares are being priced almost 40 per cent below book value. That’s a huge discount given the board are actively divesting the portfolio, and the company’s net asset value actually increased by £500,000 in the latest six month trading period. Assessing risks in divestment process Of course, one of the reasons why LSR’s shares are trading so far below book value is due to the risk that its properties fail to achieve their valuations on disposal. In the six months to end March 2016, the portfolio fell by 0.14 per cent on a like-for-like basis due to a 10 basis point widening of the equivalent yield used by Allsop LLP. This reflected a more cautious investment backdrop and the dampening effect on valuations in the run-up to the EU Referendum, a factor which may impact valuations at the end September 2016 review. And this is feeding into sale prices as the 18 freehold properties sold in that six-month period generated aggregate proceeds of £4.12m, or 1.72 per cent below their preceding valuation. That said, this is hardly a major problem given there is a £13.5m difference between the company’s market value and its net asset value, offering a hefty safety margin on the final sale prices to be achieved on the remaining £76.7m of properties yet to be sold.
It was tipped yesterday by Simon Thompson in IC- hence the re-rate: I have identified another sector play well worth considering, Local Shopping REIT (LSR:26.5p), a small cap retail sector focused property investment company with a market capitalisation of just £21.8m and one that’s in the process of selling down its portfolio with a view to returning the cash proceeds to shareholders. The change in investment policy was approved by shareholders in July 2013 and the completion date for the disposal programme is end 2017. The board have been successful to date, having sold off in excess of £94m worth of assets in the past three years. The remaining portfolio now comprises 336 individual retail properties which have over 900 units and generate an annual rent of £7.1m net of head leases, offer a market rent of £7.67m, and were valued at £76.7m at the end of March 2016. Chartered surveyors Allsops LLP used an equivalent yield of 9.5 per cent to value these assets which seems reasonable to me given that 70 per cent of LSR’s properties are let to individuals or local companies, and over 60 per cent of the leases are less than six years to expiry, so investors will demand a high yield. The units are generally located in local shopping parades and neighbourhood venues for top-up convenience shopping with around 59 per cent of the portfolio classified as A1 shops, 9 per cent cafes, and 6 per cent takeaways. Almost 15 per cent of the portfolio is residential and encompasses 219 units worth £11.39m, or £52,000 each. In terms of the portfolio valuation, two thirds of the properties were valued at less than £200,000 and accounted for £21.6m of the total portfolio; 81 units were worth between £200,000 and £500,000 to account for £24.5m of the portfolio; a further 21 units were valued at between £500,000 to £1m and had a combined valuation of £15m; and the remaining 8 units had a valuation of £15.6m. Orderly wind down of portfolio The key here is that the company has gross borrowings of £53.4m with HSBC secured against the £76.7m portfolio to give a loan-to-value ratio of 72.4 per cent, well within the 82.5 per cent covenant. In addition, LSR holds £12.3m of cash on its balance sheet which, if applied to the HSBC credit line, reduces debt to £41.2m and lowers the loan-to-value ratio to 53.7 per cent. In other words, there is no financial distress here at all and, with 20 months remaining until the HSBC facility expires in April 2018, LSR’s board are not under pressure to make fire sales to meet the end 2017 target of winding down the portfolio.
Will be interesting.. the markets are heavily pricing in a 0.25% rate cut. If this doesn't materialize expect sector stocks to soften. "If the Bank of England decides not to cut interest rates on Thursday, it will surprise the markets, which are betting heavily on a 25 basis point cut. This would be the first change in official interest rates since March 2009 — when they were cut to their present level of 0.5 per cent. But not for the first time, market pricing is running ahead of economists, who are split. While many do expect a cut, there are two strong contrary views. A good number are betting that the BoE will choose to wait until August — when it has fresh forecasts — to take any action. Alternatively, another group expects policymakers to take a shock and awe approach and combine a big cut in rates with other stimulus measures. The immediate policy decision will steal the headlines but there will be many other signals in the minutes of the first formal Monetary Policy Committee since the vote to leave the EU. Here is what to look out for: How united is the Monetary Policy Committee? Governor Mark Carney has made clear he believes some policy easing will “likely be required” over the summer. But does he have the committee behind him? Even before the Brexit vote, two members of the rate setting body — Andy Haldane and Gertjan Vlieghe — were concerned that signs of sub-par growth meant easing was needed. But the MPC also warned before the referendum that the decision to cut is not straightforward. A slump in sterling is expected to feed through into higher inflation, leaving the committee with a tricky balancing act. While unanimity would send a statement of purpose to the markets it is not necessarily the best signal for economic policymaking. With the outlook so uncertain, some level of disagreement is natural. Governors have been outvoted in the past. Discussion of “other measures” Mr Carney comments in his post-Brexit vote speech that the BoE has a “host of other measure and policies” available to support the economy, setting off a guessing game in the city. Two obvious policy options would be for the BoE to expand its quantitative easing programme and begin purchasing assets again or to extend its existing Funding for Lending scheme, which allows commercial banks cheap access to credit. A further option, Philip Shaw at Investec suggests, is shortening the maturity of its gilts with the aim of putting downward pressure on mortgage rates through lowering short-dated gilt yields and swap rates. Few bank watchers expect any of these additional measures to come into effect on Thursday, but the minutes might signal what is being considered. "
The BoE will not update its official forecasts until August and there is only limited information available so far on how the economy has responded to the shock of Brexit. What data there is, though, is consistent with Mr Carney’s public judgment of a “materially lower path for growth”. In 2008, reports from the BoE’s network of agents was one of the earliest signs that the economy was entering recession. The minutes should give some sense of the information that the BoE is starting to receive and how severe it judges the signs are. A sense of strategy Above all else, what the minutes should give us is a sense of the overall strategy developing in the BoE and the likely future path of monetary policy. There are important questions for the central bank about how it intends to balance the desire to support growth with the need to control inflation. Professor Paul Mizen of the University of Nottingham said that the country needs “a clear statement of their strategy for dealing with the most likely scenarios of delayed investment and falling growth rates that stem from increased economic uncertainty”. Market reaction With the city so convinced that action is imminent, there could be a strong knee-jerk reaction if it disappoints. After the initial roller-coaster post-Brexit ride, the markets have settled a little. But Jonathan Loynes of Capital Economics argues that this at least in part reflects “expectations that policy support is soon coming. Accordingly, a failure to meet those expectations could see market sentiment turn much more negative.
From FT.com "Barratt Developments, the UK’s largest housebuilder by output, has decided to put land-buying commitments on hold where possible and evaluate recent purchases following the Brexit vote. David Thomas, chief executive, said the group was reviewing decisions on land acquisitions made during April to June and would “defer land contracts where we can” until conditions become clearer. “The biggest decisions we make are about land expenditure and we expect to be very, very focused about every land decision,” he said. Barratt has doubled the number of homes it builds each year in the past five years, but the land review points to the potential for a more conservative approach after the EU referendum — although Mr Thomas said market conditions would become clearer in September, when it and rival housebuilders report results. The group said on Wednesday it was set to make record profits for the full year but saw its shares sink as investors received no guidance on post-referendum trading. Barratt expects to announce a 20 per cent jump in pre-tax profit to £680m for the year to the end of June, but declined to comment on trading levels since the June 23 vote to leave the EU, saying it was too soon to assess the market. The FTSE 100 group’s shares sank by more than 4 per cent in early trading before recovering to close down 1 per cent. They have shed more than 29 per cent of their value since the referendum. Analysts at Deutsche Bank said: “With uncertainty over the outlook for the UK and housebuilding post-Brexit we believe the market will be blinkered, focusing only on trading in the ‘new world’.” Brandon Lewis, housing minister, and Greg Clark, communities secretary, met with housebuilders on June 30 in the wake of the landmark vote to discuss any risks to construction in the light of the housing shortage. The sector has received extensive support through the government’s Help to Buy programme, which provides government-backed loans for first-time homebuyers so they can buy with smaller deposits. Mr Thomas said this would help to support housebuilders even if sentiment turns negative in the market for second-hand homes. Surveyors pointed to signs of a slowdown in the market for existing homes even before the vote. “[Help to Buy is] an incredible consumer offer that doesn’t exist in the second-hand market,” he said. Barratt increased forward sales by 18.7 per cent to £1.6bn during the 12 months to the end of June, and completed 5.3 per cent more homes, bringing the total to 17,319. Its average selling price rose 10.6 per cent to £260,000 during the year, while reservations per outlet per week were up 7.8 per cent to 0.69. Barratt would also keep a tight rein on capital expenditure, Mr Thomas added. The group ended the financial year with higher-than-expected net cash of £590m."
I agree.. one of the reasons I bought Bdev at 330p is the strong news pipeline, discount to Net Assets (although some intangibles) and potential near term dividend. Look forward to the trading update next week.. fingers crossed for something positive for the sector. Currently seeing no slowdown across the sector but this is historically a slow period so we probably won't know how sales rates have been affected until the autumn selling season. GLA
Strong update today, unusually positive tone for Ritchie! Maybe he's finally learning.
Interesting to consider, the last time this share was £6.20 was January 2013. Cast your mind back to that date, can anyone remember the market conditions back then? I can.. Help to Buy had not even been announced, and there was relative illiquidity in the financial sector and mortgage availability remained the main constraint. So with Help to Buy still in place, strong mortgage availability and a financial system that remains fully intact ask yourself if the current price is justifiable? GIven the evidence, I don't think so and if not in the short term, over the longer term (2-3 years) people buying at these levels will be rewarded IMO. Currently this trades on a big discount to Net Assets at 0.87* historical Dec 2015 book value. Even if this is IMO the worst run builder in the sector, that is currently not justifiable. Thinking about buying a few here but I'm put off by the terrible management team- given their inability to manage this business well over the boom years, who's to say they can manage the business well if we are about to enter a dip? For me this is one of the reasons why Bovis is one of the only builders to trade at a discount to Net Assets so far (the other is Bdev).
Good to see a disclosed buy today- an associated party of one of the NEDS. Even so, I want to see a few Director buys here to give the market more confidence. When I see that I may well be tempted to add a few more. Interesting to think about Crests revenues related to PRS too- c. 15% of their legal completions at half year came from PRS sales which will become increasingly hard to come across given the status of property funds in the current climate.
Another opportunity to tuck a few of these away in the 330's for those that missed out the first time. Even though we don't know if this has further to go down, if you have cash to tuck away for a few years at worst I don't think you can go wrong at these levels (highly possible of a short term bounce too). That is why I am now starting to buy back into the sector slowly, but with a big chunk in cash to top up if things get worse. I plan on having at least 50-60% cash until we have more certainty. This is a superb entry point for those currently predominantly in cash though. Current price to book is 1.1x forecasted for October 2016. Given the exceptional ROCE here that is cheap. On an earnings/yield basis this is now the cheapest stock in the sector but of course, earnings may well be under threat over the near term. None the less, a great calculated buy at these levels for those with cash to tuck away until the storm passes IMO. GLA and remember even if the sector drops a little further, at the moment it is all fear driven and we are seeing no real slow down. That fear may ofcourse translate into a self fullfilling prophecy, but even if it does longer term the structural imbalance of UK homes will ensure these a good profit here IMO. Ready to sink more into the sector if we see another retrace of 5-10%.
Looks like a good site, I'm sure Wicksy knows what he is doing. But nearly all major listed builders I work across in my role as a sector auditor have stopped buying land outright. Well I say have stopped, but what they have actually done is increased their hurdle rate on acquisition from c. 20% up to a whopping c. 35% to compensate for the additional risk factor of buying land at current prices given the brexit backdrop and accompanying uncertainty. If the sector sticks to these ultra high hurdle rates, land values will fall and so will EPRA NAV reported by INL. I wonder what hurdle rate this deal was acquired at, given the current conditions I am sure it is relatively high margin. It is an intresting acquisition though, a huge site sited as being purchased for the long term with 1000 units- it seems maybe Wicksy is setting this ship up for the long run rather than a quick buck now? I am tempted to purchase a few here but I would rather wait a bit and see what direction the land market is heading in. With the current ultra high hurdle rates in place across the sector big players that could be further down if this uncertainty persists, and that would pull down EPRA NAV and the share price here just depends how bad it gets- long term though I don't think you can go wrong at these levels. Those pre brexit land sales were well timed!
Bought a small chunk at 330p.. current price to book to end of June is now 0.86x the lowest in the sector. That's a substantial discount to Net Assets and one that one that I don't think is currently justifyable! Happy to add more if it goes lower too as still substantially in cash but even if it does this is undoubtedly a great buy longer term at these levels. GLA
I am very tempted to buy a few Bdev at current levels. Results for the year to June are out in Sept and forecasts estimate the current book value is currently 385p. Bdev is thus trading on a discount to NAV on a p/b multiple of just 0.91x! To put this into perspective, TW. trades at 1.4x NAV and PSN 1.7x. The only other builder trading at a discount is Bovis at 0.9x. To me Bdev looks too cheap at these levels, and even with such uncertainty at the moment, is surely an excellent medium term buy at these levels with limited downside unless property prices really do start to fall which is currently hard to see with such strong mortgage availability.
Sorry meant to post on Bdev! But Bovis does indeed look cheap on just 0.9x book value!