Last week I explained that within the property sector, it is important for investors to distinguish between property development companies and commercial property companies due to the different financial metrics that need to be considered to gauge the attractiveness or otherwise of such equities.
In the case of the commercial property companies, the main financial metric that should be considered is the dividend yield due to the regular and steady income flow which translates into sustainable dividends to investors. A review of the four commercial property companies was published last week also comparing the superior dividend yields of each of these four companies to the yield on the 10-year Malta Government Stock.
On the other hand, the price to net asset value per share (or book value per share) is the main metric that needs to be analysed for the property development companies due to the nature of their business. Moreover, it is common that during the development stage of a company’s property assets, dividends are not regularly distributed to shareholders since a company’s cash flow would be generally weak and most capital is directed towards development activities. As such, the dividend yield is not the correct metric to follow.
The three property development companies currently listed on the Regulated Main Market of the Malta Stock Exchange are Midi plc, Malta Properties Company plc and Trident Estates plc. The latter two were only admitted to the main market as a result of the spin-offs from their parent companies. Malta Properties Company plc had been spun-off from GO plc in October 2015 while the shares of Trident Estates plc were spun-off and allotted to all shareholders of Simonds Farsons Cisk plc in January 2018.
Midi plc listed its shares on the MSE in December 2010 following an Initial Public Offering when 67,369,922 shares were issued at a price of €0.45. Until recently, the share price had never surpassed the €0.45 level as the company suffered from a number of delays in the development of its two sites, namely Tigné Point and Manoel Island. However, the share price has more than doubled so far this year to a current price of €0.73 as a result of three main developments.
Firstly, the 2017 financial statements published in April 2018 showed a major revaluation of Midi’s 50 per cent investment in Mid Knight Holdings Limited - the owner of ‘The Centre’ which is a nine-storey building providing 15,000 sqm of office space.
Since ‘The Centre’ opened its doors during the last quarter of 2017 and was fully occupied at the end of the financial year, a revaluation took place and the value of Midi’s investment in MKH increased to €95 million as at December 31, 2017, compared to a value of €35.4 million as at the end of 2016. This resulted in a substantial increase in the net asset value of the company. In fact, total shareholders’ funds as at December 31, 2017 jumped to €86.6 million giving a net asset value per share of €0.404 compared to €0.315 as at December 31, 2016.
The second announcement was on June 20, 2018 when Midi published its updated Financial Analysis Summary in view of the company’s obligations as a result of its bond issue in 2016. The detailed report showed a projected increase in the net asset value per share to €0.47 at the end of 2018 as the company expected to complete the sale of most of the Q2 apartments during the current financial year. In fact, as the interim financial statements were published in August, Midi reported that it registered a significant increase in revenues during the first half of 2018 to €35.5 million following the delivery of various Q2 apartments to their respective owners. The profits arising from the sale of these properties helped the company’s equity base to grow by 12.2 per cent to €97.2 million translating into a net asset value of €0.4537.
Another major announcement that fuelled the sharp rally in the share price was issued on June 21, 2018 when Midi confirmed that it entered into preliminary discussions with Tumas Group Company Limited to explore the possibility of establishing a joint venture with respect to the development of Manoel Island. A few weeks ago, a media article was published in which it was speculated that Tumas Group will be proceeding with an acquisition for circa €100 million of at least a 60 per cent shareholding of a new company to be set up with MIDI as a joint venture for the development of Manoel Island. Midi however issued a clarification on the same day stating that no preliminary agreement has been entered into and that discussions are still ongoing and which may or may not result in a transaction. Investors ought to remain attentive to further news regarding this possible collaboration and would then need to calculate the impact on the book value per share.
The Trident Park development is being funded via debt as well as new equity through a two-stage rights issue in 2019 and 2020
Malta Properties Company had a portfolio of 15 properties upon listing in Q4 2015 with 10 properties on long-term leases (the large majority to GO plc), two properties earmarked for disposal (the St Paul’s Bay Old Exchange and the Sliema Old Exchange) and a further three properties held for re-development purposes, namely Żejtun, Marsa and Birkirkara. The shares of Malta Properties were allotted to all GO plc shareholders through a net dividend ‘in-kind’ of €0.3313 per share which was equivalent to the net asset value per share at the time. The net asset value per share increased to €0.41 as at June 30, 2018. However, this does not yet capture the sale of the Sliema Old Exchange which was concluded in August 2018 for €5 million compared to a valuation upon listing of €2.8 million.
Moreover, also in August 2018, Malta Properties Company announced that one of its wholly-owned subsidiaries entered into a promise of sale agreement (valid and effective up to three years) with Mercury Exchange Limited for the sale and transfer of the St George’s Exchange (including its surrounding land) for €13.75 million. The St George’s Exchange was valued at €2.2 million in September 2015 before the spin-off from GO plc. Assuming this is confirmed, the net asset value should be boosted tremendously in due course. Meanwhile, the market awaits further news following the announcement on May 17, 2018 that the company was entering into discussions with Smart City (Dubai) FZ LLC which, in turn, is a wholly-owned subsidiary of Dubai Holding LLC (“Dubai Holding”), for the possible acquisition by MPC of Dubai Holding’s majority shareholding in Smart City (Malta) Limited. The impact on the balance sheet of the company from such a possible material transaction could lead to significant movements in the share price of Malta Properties.
Trident Estates has a portfolio of 10 properties which were valued at €32.9 million in December 2017. The company’s two single largest assets – namely, the Brewery Façade located in Mrieħel and Trident House located in Marsa – which, in aggregate, represent almost two-thirds of the total value of investment property of the company are largely undeveloped and unexploited and are key to derive added shareholder value in future years. Development works on the Brewery Façade (the “Trident Park” project) commenced earlier this year and it is expected to take three years to complete.
The overall development at a cost of around €45 million will result in a complex housing over 15,000 sqm of office space and conference facilities as well as a multi-level car park for approximately 700 cars. The Trident Park development is being funded via debt as well as new equity through a two-stage rights issue in 2019 and 2020. On the other hand, the current built footprint of Trident House of 3,210 sqm only covers approximately 24 per cent of the total site area of 13,215 sqm. In the Prospectus published in connection with the spin-off from Simonds Farsons Cisk plc, it was stated that the company had not yet determined the best possible outcome for Trident House and its extensive surrounding land. The redevelopment of the sizeable area will possibly only materialise following completion of the Trident Park in 2021. This land was attributed a value of €10.2 million and investors should monitor the values of properties in surrounding areas in the years ahead. The shares of Trident Estates plc were distributed through a net dividend ‘in-kind’ of €1.2403667 per share – which was equivalent to the net asset value per share as at 19 December 2017. The net asset value will be changing as a result of the forthcoming rights issues and more materially following the completion of the Trident Park envisaged in 2021.
It is understandably challenging for financial analysts and investors to project the net asset value of such property development companies due to the difficultly in estimating the property values upon completion of certain developments. This is however key to understanding the right time to acquire any shares in these companies.
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