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Conygar Investment Company: Satisfactory Interim Results Confirm Progress and Undervaluation. Target Price increased to 154.1p (146.5p), Re-iterate Recommendation of Buy

Conygar, an ambitious but risk averse UK property trading and development group, released interim results for the 6-months ended 31st March 2011 on 24th May that, despite persistently difficult market conditions, showed the group increasing its net asset value (NAV) by 2.7% to 154.1p per share.

In spite of the continuing difficult property market conditions, especially outside of London, the group reported relatively steady progress overall. Headline revenue declined 38.7% from £10,904 million to £6.686 million because of the absence of trading property sales in the current year (2010: £3.1 million). However, the underlying decline in rental income was a more modest 14.3% from £7.804 million to £6.686 million due to the persistently difficult property market and the loss of rental income following the disposal of three properties for £8.8 million, for which the group was unlikely to improve the yield.

Similarly, headline direct costs fell sharply (71.5%) to £1.348 million and resulted in gross profit slipping 13.5% from £6.169 million to £5.338 million. However, the rental income margin slipped only a modest 0.8% points from a comparative of 80.6% to 79.8%. Administrative expenses continued to be constrained and fell a further 24.3% to £1.212 million while other income and expenses edged down £5,000 to £1.308 million resulting in the reported operating profit declining from £11.726 million to £5.443 million. Finance costs were reduced 56.3% from £4.97 million to £2.174 million because Conygar was successful in re-couponing its existing interest rate swaps from 5.24% to 2.38% and the transaction resulted in a one-off gain of £1.4 million because the cost of breaking the swaps had fallen from the mark to market provision at 30th September 2010; consequently, the weighted average cost of all debt including margin has fallen to 3.34%. The reported pre-tax profit fell from £6.961 million to £3.381 million although the underlying performance, after stripping out property gains of £9,000 compared with £5.8 million a year earlier, was considerably stronger rising from £1.1 million and £3.4 million.

Table: Profit & Loss Account, £000

6 months ended 31st March	2011	2010	YoY % change
Sales of Trading Properties	0	3,100	NA
Rental Income	6,686	7,804	(14.3)
Revenue	6,686	10,904	(38.7)
Sales of Trading Properties	0	(3,222)	NA
Rental Income	(1,348)	(1,513)	(10.9)
Direct Costs	(1,348)	(4,735)	(71.5)
Gross Profit	5,338	6,169	(13.5)
Gain in respect of Acquisition	0	608	NA
Income from Trading Investments	22	0	NA
Share of results of Joint Ventures	(5)	(45)	(88.9)
Gain on Sale of Investment Properties	(231)	672	NA
Other Gains & Losses	1,522	82	NA
Administrative Expenses	(1,212)	(1,602)	(24.3)
Operating Profit	5,443	11,726	(53.6)
Finance Costs	(2,174)	(4,970)	(56.3)
Finance Income	112	205	(45.4)
Profit before Taxation	3,381	6,961	(51.4)
Taxation	(1,134)	(239)	NA
Profit after Taxation	2,247	6,722	(66.6)
Eps (basic)	1.96p	5.73p	(65.8)

Source: Company

The group continued to actively manage its portfolio and during the period sold three properties where it could no longer add value for £8.8 million but also acquired 86 acres of land close to the town centre of Haverfordwest for £14 million, for which Conygar has outline planning consent for 900 residential units. A detailed planning application is being prepared and should be submitted before the year end while discussions are at an early stage with a leading residential developer for a conditional contract for the sale of serviced plots of land. Conygar also acquired a 4.67% stake in The Local Shopping REIT plc and bought back 11,827,452 ordinary shares (9.8% of the ordinary share capital) at a weighted average price of 115.6p that are held as treasury stock. Consequently, the group’s cash balance fell from 30th September 2010’s £67.322 million to £44.961 million as at 31st March 2011.

Nevertheless, the group has £98 million of available firepower before any additional refinancing or stapled debt to respond quickly should suitable opportunities arise. However, Conygar maintains that, in many cases, property asking prices are still too high with a clear and widening divergence between primary and secondary assets. Moreover, this is before the anticipated property stock that must eventually emerge as a result of the deleveraging required by the banks and some of their more highly leveraged clients.

Property companies are valued relative to Net Asset Value (‘NAV’) and Conygar offers considerable upside potential with a protected downside because of the group’s on-going share buyback programme – a further 0.2 million shares were purchased at an average price of 115.5p on the 24th May bringing the total number of Ordinary shares held as treasury stock to 12,027,452.

The group’s investment properties were independently valued as at 31st March 2011 at £142.8 million, which, on a like for like basis, was a £0.2 million decrease from the 30th September 2010 valuation. While its development projects sit in the balance sheet at cost, i.e., £27.6 million after having invested a further £13 million since 30th September 2010; we have previously estimated that these strategically sited development projects, once fully developed, could be worth comfortably in excess of £400 million. Conygar’s NAV as at 31st March 2011 was a conservatively stated 154.1p per share (see Table; Group Net Assets) – a 34% premium to the current share price.

Table: Group Net Assets

As at 31st March 2011	£ million	Per share (p)
Property Assets	142.8	131.4
Development Projects	27.6	25.4
Cash	45.0	41.4
Other net (liabilities)	(3.4)	(3.0)
Sub-total	212.0
Bank Loans	(34.3)	(31.6)
Preference Shares	(10.3)	(9.5)
Net Assets	167.4	154.1

Source: Company

While comparing Conygar to its relatively small peer group of entrepreneurial property investment companies that all have substantial available expansion capital and trade at an average 3.6% premium to NAV, further illustrates the strong investment attraction of the group. Therefore, were Conygar to be valued on a similar average multiple, the share price ought to be trading closer to 159.6p.

Table: Peer Group Analysis

Company	Share Price (p)	NAV (p)	(Discount)/Premium to NAV (%)	Dividend (p)	Dividend Yield (%)
Conygar	116	154.1	(32.8)	1.0	0.9
London & Stamford	128	140.2	(9.5 )	4.4	3.4
LXB Retail Properties	113	94.2	16.6	0.0	0.0

Source: Barclays Stockbrokers

Finally, Conygar paid a modest maiden dividend of 1p per share for its financial year ended 30th September 2010 and given the robustness of the business we estimate that this could be sustainably increased 10% pa, which further supports the investment attractions of the company. Therefore, with the shares trading at 116p and an increased target price of 154.1p we re-iterate our recommendation of buy.

Forecasts Table

Year to 30th September	Sales (£000)	Pre-tax Profit (£000)	Earnings Per Share (p)	Price Earnings Ratio (x)	NAV (p)	Discount to NAV (%)
2008A	9,375	(103)	(0.89)	NA	163.8	29.2
2009A	16,468	13,688 2	31.51	3.7	139.5	16.8
2010 A	18,515	14,878 1	11.55	10.0	150.5	22.9
2011E	12,400	5.284	3.14	36.9	154.1	24.7

Notes:

1 Including Gain on sale of investment properties £5.529 million + Movement on revaluations of investment properties £7.205 million

2 Including Gain in respect of acquisition £21.798 million.

Key Data
EPIC	CIC
Share Price	116p
Spread	115p – 117p
Total no of Shares	108.68 million
Market Cap	£125.1 million
NMS	2,000
12 Month Range	101.25p – 120p
Market	AIM
Website	www.conygar.com
Sector	Real Estate Investment
Contact	Robert Ware – Chief Executive – Officer – 020 7258 8670