SECURE Property Development and Investment Plc (LON:SPDI) invests in south eastern European real estate – an area out of investor favour, but offering secure blue chip covenanted leases at yields typically 8-10%. As a function of these markets being out of favour, and because of SPDI share issuance at below NAV leading to past NAV per share dilution, SPDI shares trade at c48% below diluted NAV/ share. A key event will take place when Terminal Brovary disposal completes (imminently). SPDI having raised occupancy from 12% when purchased, to 100% now, the sale books a profit. This event, crucially, takes SPDI to marginally profitable on its P&L (this management bought into a sub-scale operation) and marginally negative cash flow (post debt amortisation and a conservative estimate of apartment sales).
► Valuation: We consider the Terminal Brovary disposal and the ongoing reduction in overheads as game-changers. SPDI as a result of these two factors no longer needs to grow just to cover (reduced) overheads. We see manage-ment much more ‘in the driving seat’ as to taking advantage of potential equity issuance to grow further. The 48% discount to NAV per share thus appears excessive set against the track record on the acquisitions and the costs fronts.
► SPDI shares trade at a 48% (52% prospective) NAV discount. For investors, this added attraction is important. It stems, we believe, from the historic necessity to issue equity. SPDI may chose further issuance but it can now ‘take its time’ if any issuance indeed does take place. Shares in issue have grown from 9.28m as of post the initial (US$8m) new money in January 2012, to 28.17m at end 2013 and 90.01m end 2015 (and currently). Diluted, current shares total 102.9m.
► Run rate of P&L is now breakeven. It has not been so in the past, due to SPDI being sub-scale in 2011 when the current management and backers bought in.
► Administrative costs have more than halved since 2012, but the portfolio also needed to grow for even this level to be viable. As the company has now broken through to run-rate profits, the situation re share issuance is totally changed.
► SPDI: invests in south eastern European property, principally Romania, Bulgaria and Greece. The Greek asset is logistics benefiting directly from the rapid rise in Chinese-European trade through the deep-water port of Athens (Piraeus).
