Shares in $CIC – Conygar Investment Co have surged by almost 50% since the company hit an 8-year low in August of 2012, to trade around £1.20 per share. Operating in the property investment and development market, Conygar owns and manages over £173m worth of properties whilst it is developing seven sites mainly in Wales, with investment totaling £31.2m to date.
The current assets – predominantly commercial lettings – have a book value equivalent to £1.93 / share. Developments total £0.35 / share whilst the addition of cash brings the total business asset value to £2.42 / share. However, with total debt standing at £80.4m and a further £20m available to be drawn down, the NAV falls to £1.36 per share; more in line with the current market valuation. This debt has interest repayable of £3.3m per annum.
Conygar’s operations currently generate £13m per annum leaving the company on a P/E of 8.03 – some distance from the FTSE average of 13. Although the company has recently released a statement announcing its property portfolio is fully refinanced (with an additional £20m available to be drawn down against this), its seven development projects will need large investment. Haverfordwest is arguably at the most advanced stage with expenditure standing at £15.24m, and planning applications for a 60,000 sq ft Sainsbury’s and 835 residential plots having been submitted. In my opinion CIC should concentrate on sites individually, as cash generated from sales of the assets can help to self-fund further development of the other sites. This seems to be the case, as four of the seven projects have received only £2.5m collectively.
Whilst debt, and the investment required for future developments is of concern, management have decided to continue with their share buy back scheme, potentially another source of low cost income for the business. Currently it holds 8,700,000+ in its treasury, almost 10% of the issued capital. Even fully diluted it totals around 8.5% of the company. CIC are not alone in a holding of this size, Blackrock hold 10.43%, Legal & General hold 9.92% and Fidelity own 5.65% of the issued share capital. The obvious benefits to this are that the EPS for the remaining free-float shares increases, and shows confidence by the board of their own progress and decisions.
Market conditions have been admittedly weak, with residential prices failing to see similar levels seen in mid-2006. As a result of the wider sector price shocks, the property portfolio’s valuation has been reduced by some 2% in the six months to April 2013. The graph below shows the House Price Index, and it could be analysed that market sentiment is improving once again during 2013 after the recent falls of 2012. Contrary to this, the number of unoccupied assets has risen to hit 11.4% in April 2013 against a 10.4% rate in April 2012. This falling trend might of concern to some investors, but Conygar has managed to increase its rental tariffs by 4.8% whilst the CEO states initiatives are in place to reduce this and that new contracts are being written up.
The board of directors are open in stating that the organisations main interest and opportunities for monetisation are seated with its development projects. Its current rental income is therefore of secondary focus, but gives the business cash flow to help fund future activities, and assets to secure loans against. Its current Loan To Value (LTV) ratio is 46.1%, the exact same as British Land (BLND), however somewhat higher than Land Securites (LAND) and Hammerson (HMSO). With the LTV already towards the top end of the sector average, it seems unlikely that the company would set up additional financing facilities than the £20m currently in place. It seems more probable existing properties that are vacant or receiving uninspiring yields will be disposed of first.
Short-term, I believe the share price threats would be the possibility that planning applications may be rejected (although this is true for all property developers), or that rental income falls. In the medium-term Conygar may use its remaining £17.4m cash balance to fund developments, whilst drawing down further its available financing facilities. In my opinion this would damage the share price in view of a worsening LTV. Longer-term I feel the SP is undervalued, as the plethora of opportunities available to the company provide diversification and the potential for special dividends. I would look for further progression of Haverfordwest before investing – possibly news of construction, all applications being approved or the sale of segments of the site; this could take some years.
CIC will remain on my watch list, as the potential for growth and income is interesting.
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