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AIM listed property investment group First Property (LSE:FPO) has not exactly been a stellar share tip from my twelve years running t1ps.com. I tipped the stock at 19.25p in May 2008 and after publishing results for the six months to 30th September yesterday the shares trade at 18.75p. We have, to be fair, enjoyed 4.82p in dividends, so it is no disaster either. But where next? I chatted at length to the rather posh CEO Ben Habib yesterday and this is very interesting – the market capitalisation is £20.82 million.
The half year saw profits before tax fall by 13% to £2.21 million while assets under management fell by 7.2% to £347 million. Net assets increased by 6.3% to £17.84 million and net cash increased by 31.2% to £11.77 million. On the back of a 9.3% fall in earnings to 1.46p the dividend was maintained at 0.33p.On the surface that does not look great but the adverse swings at AUM and profits level are largely due to currency movements – most of First’s business is done in Poland. The very string plus point is the asset and cash backing. The divisional profits split saw profits from fund management fall by 9.9% to £1.46 million while profits from group properties ( including the Fprop opportunities PLC unit) fall by 14.6% to £1.17 million. The latter unit benefitted from a one off gain of £213,000 in 2011 so it actually more than held its own.
With First Property since it earns its revenues from fund management fees or rental income derived from long leases with good tenants there is good earnings visibility. I expect c 3p of earnings and a maintained 1.08p total dividend. There was nothing Ben said that suggested downside risk to that scenario. However the issue is what happens in August 2015.
Ben confirms that it is now certain that the USS Fund ( that is the copper plated index linked pensions of ex University Lecturers like my Dad) which First Property manages will be wound down. USS does not want exposure to Polish property. The buildings are now starting to be sold. That is a big fund accounting for 62% of FUM. And so 60% of the earnings from the division that makes 55% of profits ( that is a third of group profits) disappears in three years. That sounds grim but Ben insists that First Property is working hard to replace all of that income by 2015.
Firstly there is its own book investments. One of those made last year cost Ben $2.5 million ( call that £1.6 million). It generates an operating profit of £900,000 – yes it is a geared play. Make a couple more such investments and you have already replaced the USS earnings. Habib and his team are looking at a number of transactions and expect to complete a fund raise for FOP ( not the parent) in Q1 2013 to drive that growth. Secondly the company is looking at raising new funds. It is, as we speak looking to raise a new UK fund to mimic the investment strategy of the UK Pension Property Portfolio LP (UK PPP) fund. Given First’s excellent track record in the sector I would expect it to be launching a fund a year between now and 2015. Finally the company is expanding into advisory work helping investors raise specialist debt for property investment. With the banks exiting that market there is a gap. Any such deal would generate an upfront fee plus an ongoing annual fee.
So what does this mean for profits? Habib is insistent that the dividend will be maintained as he is of the belief that profits in the year post USS ( the contract ends August 2015) will be at least equivalent to this year’s number. On that basis it would be prudent to expect that between this year and the March 31st 2015 year earnings should increase to c4p before falling back to 3p in the year to March 31st 2016 and then rising steadily thereafter.
On the assumption that the dividend is maintained the retained earnings should see the cash/asset backing position continue to steadily improve. So why buy the stock?
Firstly, the shares trade at a very modest premium to net assets. My guess is that NAV will exceed the current market cap within 12 months.
And secondly, on the basis of a pretty much ultra safe 1.08p dividend ( safe because it is well covered and because of the cash First Property has) the yield is 5.8%
Right now you are buying the stock as an income play and long term asset play. Will it be re-rated sharply? No. Not yet. If Ben and his team can start to show how they will replace the USS lost contract, that is to show how earnings will head to c4p over the next two years then suddenly the prospect of dividend growth is back on the agenda and the shares should move sharply higher. But for that we must wait. Pro tem for a 5.8% yield the shares are a buy.
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
