Developments remain key to growth
Summary
Conygar’s NAV growth is being driven by three key areas; share buybacks, the share price of Regional REIT (it owns 8.8%) and its development portfolio which is held at cost. Management is making good progress with several of the developments although securing planning permissions for its marina residential developments is taking time.
Conygar’s share price has moved little over the year up 2% marginally underperforming the sector by 2%. At 159p it is trading at a discount of 22% to the latest reported NAV. Whilst this might look attractive given the fact the assets are not revalued and taking into consideration progress being made with the developments, the lack of dividend income and the small cap nature of the stock means we retain our Hold rating and reduce our 12 month target price to 166p (20% discount to NAV+1) showing a 5% share price total return.
Key Points
Development portfolio upside potential. The developments are split into two; £34.3m of investment properties under construction, the largest being the 40 acre Nottingham Island site at £14m (with potential for a mixed use scheme – see comment below) and £36.6m of development properties held as trading property (the largest being Haverfordwest 2). None of the properties are revalued although there may be a requirement to revalue the investment properties under construction as progress is made over the next few years (assuming the assets aren’t transferred to trading properties). The key valuation surplus would be if the company secures planning consent for a mixed use scheme in Nottingham where it proposes to submit a planning application early next year. Whilst we do not allow for it explicitly in our forecasts we believe the upside could be more than £3-4m (worth c.5-6p). In the meantime we allow for c.£2m pa of valuation/trading
profits from the development portfolio each year. The company has cash of £37m to use towards development capex (we allow for £7m pa of spend over the next few years).
Expect further share buybacks. Over the past seven years the company has bought back around 50m shares leaving just 66m currently. Share buybacks were the key contributor (4.9p) to NAV growth over the last year and we expect further buybacks over the coming year if the shares remain at a discount to NAV. However, it is impossible to know the quantum and pricing and so we just highlight that our NAV forecasts may increase over the year.
Regional REIT ownership. As a result of its portfolio sale to Regional REIT, Conygar now has an 8.8% holding in Regional REIT. We do not expect Conygar to be a long term holder of the shares (and therefore do not expect the company to be involved in Regional REIT’s latest equity raising) but for now it is a high yielding place for it to park its cash giving it c.£2m pa of dividend income which covers the majority of admin costs which are running at c.£2.6m pa. The shortfall will be made up from rental income due on completion of current developments. We do not intend to second guess where Regional REIT’s share price will be at the end of each financial year but highlight that we estimate a 5% move would impact the NAV by c.2p.
