Share Name Share Symbol Market Type Share ISIN Share Description
Terra Capital LSE:TCA London Ordinary Share IM00BFMXG143 ORD USD0.10
  Price Change % Change Share Price Shares Traded Last Trade
  0.00 0.0% 1.00 0.00 01:00:00
Bid Price Offer Price High Price Low Price Open Price
0.00 0.00 0.00 0.00 0.00
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Real Estate Investment & Services 10.88 8.30 12.65 7.9 68
Last Trade Time Trade Type Trade Size Trade Price Currency
- O 0 0.00 USD

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praipus: RNS Number : 9261L Terra Capital PLC 11 September 2012 TERRA CAPITAL PLC 10 SEPTEMBER 2012 Net asset value and report to Shareholders The Board of Terra Capital plc ("the Fund") announces that the unaudited net asset value per share on 31 August 2012 was US$0.877. Now that the summer months are over, it is time to report to our fellow shareholders what has been done in our fund since the change in investment policy. First we think it would be helpful to shareholders to review the company's investment objectives as set out in the tender offer circular. 1. Corporate activism. The concept is to invest in funds or companies with potential to turnaround or otherwise achieve recovery as a result of input from, or actions taken by, shareholders. Since the Investment Manager's standards for activist investments are rather strict, there may be few, if any, activist opportunities available. 2. Diversified portfolio of value stocks. Alongside and whilst waiting for activist opportunities the Company will invest in a portfolio of value stocks diversified by sector and country, concentrating on small and mid-cap companies with strong cash flows and positive dividends. Close attention will be paid to long term cash flow trends. We favor companies with reasonable returns on equity, strong, sustainable current dividend yields and a lack of excessive leverage. 3. Investing in emerging and frontier markets. A variety of emerging and frontier markets suffer from a lack of sufficient capital to properly value securities efficiently, causing natural inefficiencies that reward stock-picking efforts and thorough fundamental analysis. Examples include sectors which are currently out of favour or markets in which opening accounts and clearing and settling trades is procedurally more difficult. Such markets often present unusual opportunities due to various barriers to entry. 4. Provide cash flow to investors. A consistent dividend stream is an important indication of a company's strength and the company will attempt to invest in companies exhibiting high levels of corporate governance with regular dividend streams so that the Company can declare dividends to its Shareholders. With the above objectives in mind, this is what we have been investing in and our logic behind these purchases. 1. Société de la Tour Eiffel What is it: Société de la Tour Eiffel is a SIIC, a French version of a REIT (Real Estate Investment Trust) that owns mainly office parks and commercial properties on the periphery of Paris and trades on Euronext. Why did we buy this? It sells at a 38% discount to its NAV, (our average purchase price was at a 39% discount). We therefore paid roughly 1,400 Euros a square meter for office space and 450 Euros a square meter for warehouses and other types of properties. The stock yielded slightly over 10% p.a. when we started to purchase it at a price to earnings ratio (P/E) of 9.9. Office space is 85% of its portfolio value with about 15% warehouses and some other small investments. The company concentrates on office parks in the Paris outskirts and regional business hubs such as Lyon and Strasbourg which are easier to rent, but have a much lower land cost, and which lead to the lower valuation for office space per square meter than La Defense or other important office centers in Paris. The REIT'S main tenants are multinationals that want to avoid the high costs of downtown Paris for their large office staff. Much of this property is leased to large corporates (Alstom, C&S, etc.) and the state (through the Post office and Ministry of the Interior) until 2016, and these tenants represent a steady income stream. 62% of its rental income is from the top 15 tenants, and the list of tenants (set out in the annual report) consists mainly of solid multinational companies. Tour Eiffel's debt cost is relatively low at a blended rate of 3.5% p.a. and this is 93% hedged with a combination of CAPs and Swaps. Interest coverage, after all corporate expenses, is roughly 2-1 and the company is well within range of all its debt covenants and should be able to sustain a high dividend. Should pessimism on European property generally leave the market, we hope the company would re-rate to reflect this high yield, even without a significant increase in NAV, so in addition to harvesting a nice dividend it provides the potential of attractive capital gains. What could go wrong? The greatest risk is a significant drop in prices for suburban Paris office properties; however, in the period since the crises, these have shown decent resilience. The large discount, however, should provide a buffer between our investment and potential real capital losses. On the other hand, continued negative sentiment on Europe could increase the discount to NAV, thereby lowering its price. 2. U-Blox Holding AG, Switzerland What is it? U Blox is a Fabless manufacturer and R&D company involved in integrated GPS/GNSS chip technology. It has a 50% market share in the specific niches in which it chooses to compete. Why did we buy this? The company has a compelling growth potential while trading at an attractive valuation compared to its peers and is currently trading near its lowest PE since its IPO. It is difficult to come up with direct competitors for this niche player in the GPS system (most listed integrated Fabless manufacturers trade in a wide range) but it trades at a lower P/E than the two companies we felt were the most logical listed comparables. While it does trade at a premium to its book value (P/BV of 1.9x), the company's growth indicators have been higher (using a 3 year average) than its larger (in market cap) peers. The main investment case is the company's strong growth, led by R&D spending (5-year compounded average growth rate of 31% p.a.), which it has used to conquer niche markets in the development of microchip products dealing with specific GPS requirements. After we reached our target position, in early September the company announced a revenue increase of 24.3% increase over the first half year of 2011, leading to a gross profit increase resulting in a gross profit margin of 45.7% with net profit growing 20.7%. During the first half of 2012, it experienced high double-digit sales growth in the Americas and EMEA as compared to the same period in 2011. Asia experienced an economic slowdown due to weak demand for consumer devices, resulting in a small sales decrease. This company fits our profile of under-researched and under-covered stocks. There are few similar companies listed in Switzerland and the analytical coverage which does exist is available only in German which limits its access to much of the Anglo-Saxon markets and analysts. We feel that its listing on the Swiss market might have led to its current undervaluation, given the company's performance and track record. The company has been successful in growing much faster than the industry average, specifically through its discovery of profitable niches. One example is the U.S. fleet management industry, where U-Blox's chips are integrated into all of the most important Fleet Track Management companies' products. It even expanded into a market by creating a chip specifically designed to use less power so that it is highly suitable for places with large distances between them and where there is little opportunity to recharge (like Russia). As a result, U-Blox was able to get its products included into the Russian monopoly GPS system. The company also has a strong balance sheet, with 83% equity - unusual for a tech company with high R&D spending. Its 3 year average sales growth rate is 19% (5-year average compounded growth rate of 18%), exceeding both of its two close peers, Broadcom (17%) and CSR (7%). Since the IPO the management has proven competent in discovering these niche markets, and in a technology company, the proven competence of management is important. What could go wrong? In any technology company, Innovation from outside players can blindside and wrong-foot any company and there can be no guarantee that this will not happen with U-Blox. The growth of the company depends on the continued competence of management to discover and exploit profitable niche businesses on the back of specific R&D spending, which can never be guaranteed to be successful. 3. Eurobank Properties: What is it? This is a Greek REIT managed by EFG Eurobank that trades on the Athens stock exchange. We began to buy it around 4 Euros a share when it was trading at about a 60% discount to its stated NAV of 10.32 Euro. Our average unit cost of 4.26 Euro produces a discount of 59%, whilst the current price (4.73 Euro) represents a healthy 54% discount to a very conservative NAV. Why did we buy this? Eurobank was beaten down due to the Greek crisis but it seems to be a case of throwing out the baby with the bathwater. It holds Net Cash of 53 million Euros ("Net" means we calculated this number after taking into account repayment of all its liabilities, including working capital liabilities, and all outstanding mortgage debt using its cash on the balance sheet). About 14-16% of its property is in Romania and Serbia with the remainder of its assets in mainly "A" class retail and office properties in Athens with occupancy ratios around 90%. The properties generate approximately 41 Million Euros annually and have no net debt. The average price per square meter is 1,648 Euro, valuing its current properties at a cap rate of about 7%, which is in line with estimates we have received on other Greek properties, although there have obviously been few comparable transactions lately. Nevertheless, if we analyze the portfolio by disregarding its large cash position, we are effectively buying property with a 28% cap rate. At the current discount this means that we are purchasing some of the most prestigious office space in the capital of a European country at approximately 675 Euros a square meter. To put this price in perspective, it is cheaper than Moldova, Macedonia, Bulgaria, Zimbabwe or even the cheapest property we are aware of, downtown Detroit, Michigan. Despite the property being in the world's least favorite investment destination right now - or perhaps because of it - we feel the shares are a good investment. The shares sell at a P/E of 9.8x (no revaluation differences considered) with a dividend yield of 9% in Euro (10% at our purchase price). We believe that it can continue to collect the rent and payout a significant dividend. While its NAV at June 30, 2012 decreased to EUR628m or EUR10.32 per share compared to EUR11.24 as at June 30, 2011, the decline was mainly due to the decrease in the fair value of investment property. Based on its current share price of EUR4.6 +/- the company currently trades at approximately a 54% discount to its NAV. Current Developments: In its August 3, 2012 press release, the company announced the following basic ratios: -- Current ratio: 7.5x vs. 11.8x (Dec-11); -- Debt to total Assets: stable at 13%; -- Loans to Value (LTV): 15% vs. 14% (Dec-12); -- Funds from Operations (FFOs): EUR19m. vs. EUR20.1m. As of June 30, 2012 its cash and short term deposits were EUR146m (vs. EUR144m a year earlier) while outstanding loans decreased to EUR85.6m vs. EUR87.9m for the same periods. Interest income increased by 19% (from EUR3.7million to EUR4.4million) as a result of higher interest rates and successful cash management and operating expenses decreased, for the fourth consecutive year, by 11% (from EUR1.8million to EUR1.6m) due to management's successful efforts to reduce costs. Its interest expense decreased by 14% from EUR2.1million to EUR1.8m as a result of lower outstanding loans and the decrease in Euribor rates, while taxes increased by 13% from EUR1.5m to EUR1.7m mainly due to the recognition of extraordinary tax on property. Excluding fair value losses, net profit after tax amounted to EUR19m compared to EUR20m in the previous period. On August 23(rd) Prem Watsa, a Canadian value investor and chairman of Fairfax Financial Holdings, purchased 19.12% of this fund for 4.75 euro, which was a premium to the then market price of 7%. What could go wrong? In the short term, the company could suffer if Greece were ejected from the Euro (or benefit if the Euro crisis is somehow solved). Although the long term value of central business district property usually remains high, even if hyperinflation would occur due to Greece's expulsion from the Euro, until the Drachma stopped devaluing some, or all, of the rent could come in the form of less valuable Drachma. This may cause the stock price to lag the property's true valuation until some time following such devaluation. However, we believe these risks are mitigated by the low valuation in general. Other events in our Fund: We have successfully opened a Global Custody account with BNY Mellon and have started to buy other stocks around the world that seem to have compelling stories. We will share this information with our investors as soon as we are able to build up reasonable positions. As of September 10, 2012 we hold mainly cash and the following major positions, using an approximate valuation on Sept. 10: Stock Number of Shares USD Valuation Tour Eiffel 25,167 1,353,000* ----------------- -------------- Eurobank Properties 137,996 840,000 ----------------- -------------- U-Blox 21,904 952,000 ----------------- -------------- *valuation noted is ex-dividend to which the fund is entitled, which adds about $67,500 of value to this position. In addition to some smaller positions we are in the process of building up, this means TCA is currently about 5.5% invested. The Investment Manager will continue to buy slowly as it locates opportunities but will not rush to invest simply to "get invested". That said, some quite interesting opportunities in a number of developed and frontier markets have been located and it is reasonable to expect that the fund will be 10-15% invested in the near future.
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