Aiming high with acquisition and placing

Palace Capital 11 October 2017 Update
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Palace Capital

Aiming high with acquisition and placing

Acquisition and placing

Real estate

11 October 2017

Price

347.5p

Market cap

£159m

Net debt (£m) at 31 March 2017

68.6

Shares in issue (inc. 20.6m shares issued under placing and open offer)

45.8m

Free float

95%

Code

PCA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(9.2)

(4.9)

5.9

Rel (local)

(11.2)

(7.4)

(1.5)

52-week high/low

387.8p

328.2p

Business description

Palace Capital is an AIM-listed UK property investment company. It is not sector-specific and looks for opportunities where it can enhance the long-term income and capital value through asset management and strategic capital development in locations outside London.

Next events

Interim results

November 2017

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Palace Capital is a research client of Edison Investment Research Limited

Palace Capital shareholders have approved the significant acquisition of RT Warren, with a mixed use investment portfolio valued at £71.8m, and the issue of shares to fund it. Management has built a strong track record of value creation from previous acquisitions and expects its management of these newly acquired assets to yield similar results. That potential is not reflected in our revised estimates with the effect that earnings and NAV are diluted. Our dividend forecasts remain the same, and fully covered, such that Palace retains a highly attractive yield and discount to NAV. The increased market capitalisation and intention to seek a Main Market listing are likely to broaden Palace’s appeal to a wider investor base.

Year end

Net rental income (£m)

Adj. EPRA earnings* (£m)

Adj. EPRA EPS* (p)

EPRA NAV/
share (p)

Price/EPRA NAV/share (x)

DPS
(p)

Yield
(%)

03/16

13.0

4.6

18.9

414

0.84

16.0

4.6

03/17

12.2

5.7

22.2

443

0.78

18.5

5.3

03/18e

14.4

7.1

19.9

392

0.89

19.0

5.5

03/19e

18.3

9.8

21.5

394

0.88

19.5

5.6

Note: *Adjusted EPRA earnings exclude revaluation gains, profits or losses on disposals of investment properties and surrender gains on early lease terminations.

Asset management opportunity

The acquired portfolio consists of mixed commercial properties, mostly located in the Home Counties that surround London, and 65 residential properties that are predominantly located around the London Borough of Hillingdon. It has been valued, on an open market and fair value basis, by Cushman & Wakefield at £71.8m with current annual gross income of c £3.7m, of which c 80% relates to the commercial assets. Management expects to grow the commercial rents over time through more active management, while the residential assets are likely to be disposed of, subject to price, freeing up capital for recycling into higher yielding commercial property assets, which remain the focus.

But initial dilution

The acquisition was settled for £53.3m in cash with £14.5m of debt assumed. It has been funded by the issue of £70m of new equity, before costs, at a price of 340p per share. The amount raised reduces net LTV below 35% and provides PCA with sufficient headroom should the existing RT Warren banking facility be repaid at expiry at the end of January 2018. The asset management upside from the acquired assets, including capital recycling, is not reflected in our revised forecasts, or the potential for further acquisitions given the increased balance sheet flexibility. Without building this in, our pre-acquisition adjusted EPRA EPS is diluted by 25% and EPRA NAV by 14%.

Valuation: Upside not reflected in price

Palace emerges from the acquisition and placing with an 11% discount to the end-FY18e EPRA NAV and fully covered 5.5% prospective yield. As we show on page 6, this is attractive in a sector context and does not obviously reflect anticipation of upside from the acquired assets or ongoing portfolio initiatives.

Aiming high with acquisition and placing

Palace has built a strong track record of value creation since its first portfolio acquisition, the Sequel portfolio, in October 2013. In the three and a half years to the end of the last financial year (31 March 2017), NAV per share increased by 103% while dividends per share grew strongly. The portfolio acquired through the corporate acquisition of RT Warren (Investments) is significant in terms of size, adding one-third to investment portfolio assets, while the new equity capital issued in the process substantially increases the market capitalisation and potential liquidity of the group’s shares. Palace is an active manager of its assets and fully expects to be able to increase rental income on the acquired commercial assets, which it feels have historically been under-managed. The residential assets (c 20% of the acquired rental income) will potentially be sold and the capital recycled into higher yielding commercial assets. There is room to further gear the balance sheet should attractive acquisition opportunities present themselves, with a post-transaction net loan to value ratio (LTV) of less than 35%. None of this potential can be credibly captured in our revised estimates, which treat the acquired assets on an ‘as is’ basis. On this basis, in the first full year post-acquisition (FY19), our adjusted EPRA EPS forecast is diluted by 25% and EPRA NAV per share by 14%. Our dividend per share forecasts are unchanged and remain fully covered, albeit at a lower level of cover, despite the increased number of shares. The share price has fallen by c 12% from a year high of 395p before the transaction was announced, and the discount to prospective NAV has narrowed slightly in consequence, but remains relatively wide. This seems particularly so, when considering the attractive 5.5% dividend yield, the track record of value creation from active asset management of acquired assets, and the increased scale of the group. The move to quarterly dividend payments from April 2018 will see dividend payments representing c 7% of the share price over the next 12 months. Following the completion of this acquisition, Palace intends to commence preparations to apply to join the Official List of the London Stock Exchange.

The RT Warren transaction

The RT Warren portfolio has been acquired through the corporate acquisition of RT Warren (Investments) for a cash consideration of £53.3m plus retained debt of £14.5m, in aggregate representing the expected net assets of RT Warren at completion. The portfolio consists of mixed commercial properties, including offices, retail units, and industrial units, the majority of which (more than 90%) are located in the Home Counties that surround London, and 65 residential properties that are predominantly located around the London Borough of Hillingdon. It has been valued, on an open market and fair value basis, by Cushman & Wakefield at £71.8m with current annual gross income of c £3.7m.

The acquisition has been funded by the issue of £70m of new equity, before costs, at a price of 340p per share, £66.2m in a placing and £3.8m in an open offer to qualifying existing shareholders. The amount raised provides Palace with sufficient headroom should the existing RT Warren banking facility be repaid at expiry at the end of January 2018.

The new assets acquired

Twenty-one commercial properties have been acquired, including 15 office buildings, four predominantly retail properties, and two industrial units, all freehold and spread over 14 different locations. With its Home Counties focus, management considers these assets to be geographically complementary to the existing Palace portfolio. The total acquired floor area is c 255,000 sq ft, 85.3% let, to 58 lessees, with a weighted average unexpired lease term of 4.5 years to first lease break and 6.1 years to expiry. The commercial properties account for c £2.9m of the total portfolio gross rent roll, an average of £11.45 per sq ft, which Palace management believes offers significant growth potential over time through more active management. Management also believes that there may be opportunities to enhance certain of the assets within the portfolio by applying for planning permission for a change of use.

The residential assets comprise 61 houses and four flats in nine locations, and are close to being fully occupied, generating a current gross rental income of £0.8 million pa. Palace management is reviewing the strategy for the residential assets and has indicated that, subject to a satisfactory price being achievable, these are likely to be disposed of, freeing up capital for recycling into commercial property assets, which remains Palace’s focus. We would expect a sale value, in current market conditions, to be in the region of £20m, and recycling into commercial property assets at c 7% would significantly improve the return on this capital.

Successful track record of value-creating acquisitions

The RT Warren transaction is notable for its scale but is consistent with the strategy that Palace has successfully pursued in recent years. The company invests in UK commercial property outside London and is sector-agnostic, with offices making up the largest portion of the portfolio both before and after the RT Warren acquisition. Its strategy seeks to enhance capital values and provide a sustainable and growing income stream by acquiring assets with potential for rent increases through the reduction of void costs, refurbishment and, in some cases, redevelopment or refurbishment. Most properties are held for long-term rental income, but the company also realises capital value through selective disposals where opportunities arise.

On a spectrum with very low-risk, buy-and-hold REITs at one end and speculative developers at the other, Palace is in the middle: it has the flexibility to invest earnings in capital-enhancing asset management projects, unconstrained by the REIT property income distribution requirement (albeit the payout ratio is currently similar to a REIT’s), and is willing to assume some development risk where the potential returns are attractive, but also has a stable core portfolio producing sustainable rental income as well as providing opportunities for capital growth.

The company was given its current form in 2010 when Neil Sinclair (the current CEO) and others acquired an AIM-listed vehicle for the purpose of property investment. The current portfolio has been built by acquisition since late 2011, but the first transformational acquisition came in October 2013 when a portfolio (the Sequel portfolio) of 24 properties from around the UK was acquired from Quintain and Buckingham Properties. Palace paid £39.25m for the properties, which were valued at the time at £44.2m with a net rent receivable of £5.2m pa. Active asset management since has seen seven properties disposed of by 31 March 2017, at prices either at or above book value. The remaining portfolio was independently valued at 31 March 2017 at £66.9m. Net rent receivables had fallen to £3.98m with disposals but also with the planned vacancy at Hudson House in York, a major redevelopment opportunity that recently received planning consent.

The August 2014 acquisition of the PIH portfolio, comprising 17 properties split into 55 individual units, for £32.0m was a further significant step. Two of the properties have since been sold for £2.58m, either at or above book value. At 31 March 2017, the remaining properties were independently valued at £37.8m with net rent receivables of £2.62m.

Outside of these notable portfolio acquisitions, Palace has been active with numerous smaller acquisitions, investing £97m in seven transactions in the three years since the PIH acquisition (excluding RT Warren).


Financials

The main purpose of this section is to explain the impact of the RT Warren acquisition and related capital increase on our forecasts. To do so we provide a detailed comparison of our forecasts for Palace, prior to the RT Warren acquisition and capital increase, and our new forecasts for the enlarged group. However, as a starting point our forecasts for Palace pre-RT Warren/capital increase are slightly revised compared with those last published, now allowing for the potential letting of recently refurbished office space in Manchester, Leeds, and Milton Keynes and lower than previously assumed acquisition costs on the corporate acquisition of the SM Newcastle acquisition.

Adjustments to pre-acquisition estimates

For the current year, we have reduced our estimate of the acquisition costs relating to the £20m acquisition in August of the entire share capital of SM Newcastle OB (SM Newcastle), which owns a mixed-use, modern, office, residential, hotel and retail development in central Newcastle. As a corporate acquisition, there will be a significantly lower stamp duty payable than previously allowed for. We have also now assumed that the remaining c 44,000 sq ft of refurbished office space in Manchester, Leeds, and Milton Keynes will be let over the next year, with a positive impact on FY19 rental income. At an assumed £17.25 per sq ft (similar to the recently agreed let on 5,200 sq ft of space at the Manchester property (Boulton House), the positive impact on our gross rent roll going into FY19 is c £760k.

Acquisition and capital raising impact

In Exhibit 2 we set out our revised estimates for PCA’s pre-acquisition/capital increase, the impact of RT Warren and the capital increase, and our revised estimates for the group for FY19. We show FY19 as this captures a full-year impact. There will obviously be a part-year impact in the current year, which is included in our group estimates (Exhibit 7). It is important to note that we have modelled the RT Warren assets as acquired, with no assumptions about the impact of asset management initiatives or recycling of capital from the residential assets or other parts of the portfolio.

We have noted above how the acquisition and capital increase has significantly increased the size of Palace in terms of market capitalisation. That same increase in scale can be seen in the one-third increase in investment property value shown in Exhibit 1. There is less of an impact on rental income, primarily reflecting the lower yield residential assets within those acquired, but profits benefit from efficiency gains and lower average gearing.

Exhibit 1: Impact of RT Warren acquisition on key financial items

£m unless otherwise stated

PCA excl. RT Warren

RT Warren/capital increase

FY19 combined forecast

% change

Income statement

Gross rental income

15.7

3.7

19.4

24%

Net rental income

15.0

3.3

18.3

22%

Operating profit

11.7

3.3

15.0

29%

Interest expense

(3.3)

(0.3)

(3.7)

10%

PBT

8.3

3.0

11.3

36%

Adjusted EPRA earnings

7.3

2.6

9.8

35%

Adjusted EPRA EPS (p)

28.7

(7.2)

21.5

-25%

DPS (p)

19.5

N/A

19.5

0%

Dividends

4.9

N/A

9.0

86%

Balance sheet

Investment properties

204.6

67.8

272.4

33%

Borrowings

97.3

14.5

111.9

15%

Net assets*

113.7

67.6

178.6

57%

EPRA net assets*

115.9

67.6

180.8

56%

EPRA NAV per share (p)

457

N/A

393.7

-14%

Number of shares (m)

25.3

20.6

45.9

81%

Net LTV

40.9%

31.9%

Source: Edison Investment Research. Note: *The difference between net assets and EPRA net assets including and excluding RT Warren includes a dividends paid effect in addition to the new equity raised.

However, with the number of shares in issue increased by 81%, initial earnings per share and NAV per share are diluted. Our adjusted EPRA EPS per share declines by 25% and EPRA NAV by 14%. The larger dilution of EPS again partly reflects the lower yield on the assets acquired, particularly the residential assets, and the recycling of capital from these to higher yielding commercial assets is an obvious potential source of uplift. Our new forecasts put the net LTV ratio at 31.8% at end-FY19 compared with a forecast 40.9% at end-FY19 before the transaction. We assume that the bank facility acquired with RT Warren will be refinanced/replaced with similar debt; if this is the case, then having raised additional equity capital for the potential repayment of the acquired debt, Palace would be in a position where it could re-gear the balance sheet by acquiring additional yielding assets, irrespective of recycling capital. This represents a further potential source of upside to our forecasts.

Forecast changes

Bringing together our estimate changes for the pre-acquisition business with the impacts of the acquisition/capital increase, we show the change in estimates compared with those last published in Exhibit 2. Importantly, there is no change to our dividend per share forecasts and management has indicated that the company intends to pay an interim dividend of 9.5p on 29 December 2017, before moving to a quarterly dividend payment commencing April 2018. The change means that over the next 12 months, shareholders will be entitled to the December 2017 payment as well the first three quarterly dividends in respect of FY19, which on our forecasts represents a yield of 7% over the period.

Exhibit 2: Estimate revisions

Net rental income (£m)

Adjusted EPRA EPS (p)

EPRA NAV per share (p)

Dividend per share (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

03/18e

12.5

14.4

15.9

21.7

19.9

(8.2)

449

392

(12.9)

19.0

19.0

0.0

03/19e

14.0

18.3

30.3

24.9

21.5

(13.8)

458

394

(14.0)

19.5

19.5

0.0

Source: Edison Investment Research

Valuation

Dividends declared have averaged 84% of adjusted EPRA EPS in the past two years and our estimates suggest an average 93% payout over the next two years. Although PCA is not a REIT, this current level of payout is at a similar level to the UK REIT sector and the prospective dividend yield of 5.4% is towards the upper end of prospective yields offered by the broad sector (Exhibit 4).

The shares have retreated from a 12 month high of 395p before the announced acquisition and capital increase, a downward move of c 10%, somewhat less than the 14% dilution of our FY19 NAV per share forecast. The 11% discount to trailing NAV (the stated 31 March 2017 NAV per share adjusted for the capital increase) on which Palace now trades, positions it in the lower half of the sector (Exhibit 5).

Exhibit 3: Peer group prospective dividend yields

Exhibit 4: Peer group historical P/NAV

Source: Bloomberg, data as at 5 October 2017. Edison Investment Research.

Source: Bloomberg, data as at 5 October 2017. Edison Investment Research.

Exhibit 3: Peer group prospective dividend yields

Source: Bloomberg, data as at 5 October 2017. Edison Investment Research.

Exhibit 4: Peer group historical P/NAV

Source: Bloomberg, data as at 5 October 2017. Edison Investment Research.

As noted above, Palace has built a strong track record of value creation since its first major portfolio acquisition, the Sequel portfolio, in October 2013. In the three and a half years to the end of the last financial year (March 2017) it grew NAV per share by 103% and increased dividends per share strongly.

Exhibit 5: Progressive dividends per share

Exhibit 6: NAV growth since Signal acquisition vs peers

Source: Palace Capital June 2017 investor presentation

Source: Palace Capital June 2017 investor presentation, Arden Partners. Note: 3.5 years to 31 March 2017.

Exhibit 5: Progressive dividends per share

Source: Palace Capital June 2017 investor presentation

Exhibit 6: NAV growth since Signal acquisition vs peers

Source: Palace Capital June 2017 investor presentation, Arden Partners. Note: 3.5 years to 31 March 2017.

As noted above, our forecasts have built in no upside from asset management on the newly acquired assets because there is no convincing way that this can be prospectively modelled. But that is not to say that we do not expect such action. Meanwhile, we would argue that the current valuation has built in no anticipation of such progress from the newly acquired assets or ongoing portfolio initiatives, particularly the Hudson House development in York. Furthermore, as a larger and potentially more liquid company we would expect the shares to appeal to a wider group of investors and this could be the case especially as Palace makes preparations to apply to join the Official List of the London Stock Exchange.

Exhibit 7: Financial summary

Year end 31 March

£000s

2014

2015

2016

2017

2018e

2019e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Rental & other income

 

 

3,252

8,637

14,593

14,266

16,093

19,418

Non-recoverable property costs

(648)

(1,200)

(1,624)

(2,055)

(1,655)

(1,124)

Net rental income

 

 

2,604

7,437

12,969

12,211

14,438

18,294

Administrative expenses

(649)

(1,439)

(2,048)

(2,915)

(3,100)

(3,300)

Operating Profit (before amort. and except).

 

 

1,955

5,998

10,921

9,296

11,338

14,994

Revaluation of investment properties

19,501

9,769

3,620

3,101

1,500

0

Costs of acquisitions/profits on disposals

270

(461)

(525)

3,191

(1,317)

0

Operating Profit

21,725

15,306

14,016

15,588

11,520

14,994

Net Interest expense

(573)

(1,398)

(2,264)

(3,011)

(3,220)

(3,660)

Profit Before Tax

 

 

21,153

13,909

11,752

12,577

8,300

11,334

Taxation

81

107

(953)

(3,191)

(1,245)

(1,700)

Profit After Tax (FRS 3)

21,234

14,015

10,799

9,386

7,055

9,634

EPRA adjustments:

Revaluation of investment properties

(-19,501)

(-9,769)

(-3,620)

(-3,101)

(-1,500)

0

Costs of acquisitions/profits on disposals

(-270)

461

525

(-3,191)

1,317

0

Deferred tax charge

0

0

0

2,200

0

0

Debt termination cost

0

0

0

155

0

0

EPRA earnings

1,463

4,707

7,704

5,449

6,872

9,634

Adjusted for:

Surrender premium

0

0

(-3,172)

0

0

0

Share-based payments

12

114

110

237

200

200

Adjusted EPRA earnings

1,475

4,821

4,642

5,686

7,072

9,834

Company adjusted PBT

1,394

4,714

5,595

6,677

8,317

11,534

Average fully diluted number of shares outstanding (000s)

5,264.3

17,488.9

24,618.0

25,737.7

35,607.4

45,926.5

Basic EPS - FRS 3 (p)

 

 

403.4

80.1

43.9

36.5

19.8

21.0

Fully diluted normalised (p)

 

 

31.4

28.3

18.9

22.2

19.9

21.5

Fully diluted EPRA EPS (p)

 

 

29.1

26.9

31.3

21.2

19.3

21.0

Dividend per share declared (p)

4.5

13.0

16.0

18.5

19.0

19.5

Dividend cover (x)

6.47

2.07

1.96

1.14

1.02

1.08

BALANCE SHEET

Fixed Assets

 

 

60,086

104,470

175,738

183,959

272,475

272,475

Investment properties

59,440

102,988

174,542

183,916

272,432

272,432

Goodwill

6

6

0

0

0

0

Other non-current assets

640

1,475

1,196

43

43

43

Current Assets

 

 

7,060

15,653

11,903

13,692

25,048

26,358

Debtors

1,937

3,375

3,327

2,511

2,511

2,511

Cash

5,123

12,279

8,576

11,181

22,537

23,847

Current Liabilities

 

 

(4,171)

(3,487)

(9,048)

(8,197)

(8,197)

(8,197)

Creditors

(2,971)

(3,087)

(6,815)

(6,161)

(6,161)

(6,161)

Short term borrowings

(1,200)

(400)

(2,233)

(2,036)

(2,036)

(2,036)

Long Term Liabilities

 

 

(18,599)

(36,620)

(71,778)

(79,895)

(111,711)

(112,011)

Long term borrowings

(17,384)

(35,407)

(69,711)

(75,758)

(107,574)

(107,874)

Deferred tax

0

0

0

(2,187)

(2,187)

(2,187)

Other long term liabilities

(1,215)

(1,214)

(2,067)

(1,950)

(1,950)

(1,950)

Net Assets

 

 

44,376

80,016

106,815

109,559

177,615

178,625

EPRA net assets

 

 

44,370

80,010

106,924

111,759

179,815

180,825

Basic NAV/share (p)

357

396

414

436

387

390

EPRA NAV/share (p)

219

396

414

443

392

394

CASH FLOW

Operating Cash Flow

 

 

1,297

4,388

12,287

10,294

10,220

15,194

Net Interest

(390)

(1,593)

(3,421)

(2,516)

(2,920)

(3,360)

Tax

(13)

(15)

(158)

(1,047)

(1,245)

(1,700)

Preference share dividends paid

(18)

0

0

0

0

0

Net cash from investing activities

2,532

(2,922)

(50,012)

(3,108)

(72,500)

0

Ordinary dividends paid

0

(1,766)

(3,221)

(4,617)

(6,749)

(8,824)

Debt drawn/(repaid)

(21,266)

(10,600)

21,272

5,861

17,000

0

Proceeds from shares issued

23,009

19,664

19,114

29

67,550

0

Other cash flow from financing activities

(66)

(2)

(2)

(2,291)

0

0

Net Cash Flow

5,085

7,155

(4,141)

2,605

11,356

1,310

Opening cash

 

 

39

5,123

12,278

8,576

11,181

22,537

Other items (including cash assumed on acquisition)

0

0

439

0

0

0

Closing cash

 

 

5,123

12,278

8,576

11,181

22,537

23,847

Closing debt

19,509

37,021

74,011

79,744

111,560

111,860

Closing net debt/(cash)

 

 

14,385

24,742

65,435

68,563

89,022

88,012

Source: Company data, Edison Investment Research

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Palace Capital and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Palace Capital and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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