Another NAV-accretive disposal

Palace Capital 14 March 2017 Update
Download PDF

Palace Capital

Another NAV-accretive disposal

Property disposal

Real estate

14 March 2017

Price

350p

Market cap

£89m

Net debt (£m) at 30 September 2016

73.5

Shares in issue

25.7m

Free float

94%

Code

PCA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.7)

(4.1)

5.3

Rel (local)

(1.9)

(9.6)

(11.6)

52-week high/low

375.0p

307.5p

Business description

Palace Capital is an AIM-quoted property investment company focused on commercial real estate in the UK outside London. The portfolio is diverse, with the largest weighting in offices. Management aims to increase capital value and provide a sustainable and growing income stream.

Next events

Financial year-end

31 March 2017

FY17 results

June 2017

Analysts

Julian Roberts

+44 (0)20 3077 5748

Andrew Mitchell

+44 (0)20 3681 2500

Palace Capital is a research client of Edison Investment Research Limited

Palace continues to demonstrate its ability to grow NAV per share through its strategic recycling of assets. The disposal of a property in Maldon has realised value created through recent asset management initiatives. As with two other recent sales, this is in line with the company’s strategy to increase shareholder value through active management of the investment portfolio. We have adjusted our forecasts for the £1.56m gain in value and, although we have not assumed any additional acquisitions, would expect Palace to reinvest the proceeds in other regional property assets at attractive yields and with further scope for capital gains.

Year
end

Revenue
(£m)

Adjusted EPRA earnings* (£m)

Adjusted EPRA EPS (p)

EPRA NAV/share (p)

DPS
(p)

Yield
(%)

03/15

8.6

4.8

28.3

396

13.0

3.7

03/16

14.6

4.6

18.9

414

16.0

4.6

03/17e

14.0

5.0

20.9

430

18.0

5.1

03/18e

13.5

5.5

21.9

433

18.0

5.1

03/19e

13.1

5.8

23.1

439

18.0

5.1

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

Value-added through asset management

The ICS building in Maldon is let to Rockwell Automation (which remains a tenant of Palace in Milton Keynes) and following the recent extension of the lease, has little further scope for active asset management to add value in the near term. The gain on the carried value of the property equates to c 6p per share and crystallises the value of the property management team’s work to date. It follows the disposal of two adjacent properties in September 2016 and two further disposals in February, all at significant premiums to book value and thus all NAV-accretive.

Reinvestment to come

Palace has now sold properties for a total of £7.6m in the last month, giving the company enough funds to make an acquisition of the scale of Boulton House in Manchester (its most recent purchase). While we have not allowed for further investment in our modelling assumptions, we believe that the company has a healthy pipeline of opportunities for new investment beyond improvement of its existing portfolio and we would expect management to deploy the funds in FY18 and continue to grow its income.

Valuation: Significant unrecognised value

Palace’s shares trade at c 16% below last reported EPRA NAV per share of 419p, and the company has made disposals in the last month at c 9p per share above the book value of the assets in total. With some earnings being retained and allowing for the share buyback announced on 13 March, we forecast EPRA NAV of 430p per share at 31 March 2017, the financial year-end, implying that the shares trade at a discount of 19%. This is well above the average of regional property investment peers, which trade at close to or above EPRA NAV. As illustrated on page 2, there appears to be scope for this gap to close, supported by the earnings yield. Possible catalysts include the full-year results and reinvestment of capital.

Details of the disposal

The property which has been sold is currently let to Rockwell Automation. The existing lease runs out in June 2017 and is for £375k per annum. Palace announced in December 2016 that a ten-year lease extension had been signed with mutual breaks in June 2020 and June 2024 (at three and seven years) and an agreed rent review to not less than £394,128 in June 2022. The adjacent properties, 4 and 5 Hall Road, were sold by Palace for £1.03m in September: No 4 was let on a rolling annual lease and No 5 was vacant. The ICS building has been sold for £3.9m, equating to c £52 per sq ft and a 66% premium to the £2.34m valuation as of 30 September 2016. The £1.56m gain on the book value is equivalent to 6p per share before tax.

As with the disposals announced in February, this gain was not included in our forecasts (see our note of 28 February). As with the earlier disposals, the rationale for this sale is clear; it crystallises considerable value from asset management initiatives including the lease extension, and allows Palace to recycle capital into other investments.

Adjusting for the 0.5m share buyback (at 340p, and therefore NAV accretive on a per-share basis) and without assuming further asset acquisitions, the disposal reduces our rental income and EPS forecasts from FY18, although we would expect Palace to invest the capital. We have also not assumed that any additional debt will be repaid to save finance costs, and note that our forecasts now indicate a cash balance of c £14m in March 2017, up from £9.3m at September 2016. This represents a cash drag and we therefore view our forecasts as conservative. For illustration, if we assumed that £10m could be invested in H118, with 5% purchaser’s costs and at a 7% net initial yield, our FY18 EPRA EPS forecast would rise to 22.7p and 24.0p in FY19.

Exhibit 1: Estimate changes

Rental income (£m)

EPRA EPS (p)

EPRA NAV per share (p)

Dividend per share (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

03/17e

14.0

14.0

0.0%

21.2

20.4

-4.1%

424

430

1.4%

18.0

18.0

0%

03/18e

13.7

13.5

-2.0%

21.5

21.2

-1.4%

428

433

1.3%

18.0

18.0

0%

03/19e

13.4

13.1

-2.7%

22.9

22.4

-2.1%

433

439

1.2%

18.0

18.0

0%

Source: Edison Investment Research

Valuation: Further NAV gains

This additional NAV increase means that the shares now trade at a 21% discount to our FY17e EPRA NAV. This seems high compared with the peer group (Exhibit 2) and we would expect the shares to move closer to the peer average as the capital is redeployed.

Exhibit 2: P/EPRA NAV vs EPRA EPS yield on EPRA NAV

Source: Company data, Bloomberg, Edison Investment Research. Peers are Custodian REIT (CREI), Mucklow (MKLW), Picton Property Income (PCTN), Real Estate Investors (RLE), Regional REIT (RGL) and Schroder REIT (SREI).

Exhibit 3: Financial summary

Year end 31 March

£'000s

2014

2015

2016

2017e

2018e

2019e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

3,252

8,637

14,593

13,969

13,468

13,073

Cost of Sales

(648)

(1,200)

(1,624)

(2,321)

(1,858)

(1,392)

Gross Profit

2,604

7,437

12,969

11,648

11,610

11,681

Administrative expenses

(649)

(1,439)

(2,048)

(2,626)

(2,554)

(2,628)

Operating Profit before revaluation

1,955

5,998

10,921

9,022

9,056

9,053

Revaluation of investment properties

19,501

9,769

3,620

32

1,500

0

Costs of acquisitions/profits on disposals

270

(461)

(525)

3,183

0

0

Operating Profit

21,725

15,306

14,016

12,237

10,556

9,053

Net Interest

(573)

(1,398)

(2,264)

(2,822)

(2,427)

(2,328)

Profit Before Tax (norm)

1,652

4,139

8,132

9,383

6,629

6,724

Profit Before Tax (FRS 3)

21,153

13,908

11,752

9,415

8,129

6,724

Taxation

81

107

(953)

(1,350)

(1,219)

(1,009)

Profit After Tax (norm)

1,733

4,246

7,179

8,033

5,410

5,716

Profit After Tax (FRS 3)

21,234

14,015

10,799

8,065

6,910

5,716

EPRA earnings

1,463

4,707

7,704

4,850

5,410

5,716

Adjusted for:

Surrender premium

0

0

(3,172)

0

0

0

Share-based payments

0

114

110

145

100

100

Adjusted EPRA earnings

1,463

4,821

4,642

4,995

5,510

5,816

Average Number of Shares Outstanding (m)

5.3

17.1

24.6

25.7

25.5

25.5

EPS - normalised (p)

 

32.9

24.8

29.2

31.3

21.2

22.4

EPS - FRS 3 (p)

 

403.4

82.0

43.9

31.4

27.0

22.4

Adjusted EPS

 

29.7

28.3

18.9

20.9

21.9

23.1

EPRA EPS (p)

 

27.8

27.5

31.3

20.4

21.2

22.4

Dividend per share (p)

0.0

13.0

16.0

18.0

18.0

18.0

Dividend cover (x)

N/A

2.12

1.96

1.13

1.18

1.24

BALANCE SHEET

Fixed Assets

 

60,086

104,470

175,738

181,007

182,507

184,507

Investment properties

59,440

102,988

174,542

179,997

181,497

183,497

Goodwill

6

6

0

0

0

0

Other non-current assets

640

1,475

1,196

1,010

1,010

1,010

Current Assets

 

7,060

15,653

11,903

17,232

14,979

12,232

Debtors

1,937

3,375

3,327

3,170

3,170

3,170

Cash

5,123

12,279

8,576

14,062

11,809

9,062

Current Liabilities

 

(4,171)

(3,487)

(9,048)

(11,193)

(11,193)

(11,193)

Creditors

(2,971)

(3,087)

(6,815)

(7,952)

(7,952)

(7,952)

Short term borrowings

(1,200)

(400)

(2,233)

(3,241)

(3,241)

(3,241)

Long Term Liabilities

 

(18,599)

(36,620)

(71,778)

(78,775)

(75,539)

(73,503)

Long term borrowings

(17,384)

(35,407)

(69,711)

(76,709)

(73,473)

(71,437)

Other long term liabilities

(1,215)

(1,214)

(2,067)

(2,066)

(2,066)

(2,066)

Net Assets

 

44,376

80,016

106,815

108,271

110,754

112,043

Net Assets excluding goodwill and deferred tax

44,370

80,010

106,815

108,271

110,754

112,043

Basic NAV/share (p)

219

395

414

430

433

439

EPRA NAV/share (p)

219

396

414

430

433

439

CASH FLOW

Operating Cash Flow

 

1,297

4,388

12,287

9,663

9,176

9,173

Net Interest

(390)

(1,593)

(3,421)

(2,529)

(2,427)

(2,328)

Tax

(13)

(15)

(158)

(876)

(1,219)

(1,009)

Preference share dividends paid

(18)

0

0

0

0

0

Net cash from investing activities

2,532

(2,922)

(50,012)

(2,258)

(20)

(2,020)

Ordinary dividends paid

0

(1,766)

(3,221)

(4,612)

(4,527)

(4,527)

Debt drawn/(repaid)

(21,266)

(10,600)

21,272

8,241

(3,236)

(2,036)

Proceeds from shares issued

23,009

19,664

19,114

38

0

0

Other cash flow from financing activities

(66)

(2)

(2)

(2,180)

0

0

Net Cash Flow

5,085

7,155

(4,141)

5,487

(2,253)

(2,747)

Opening cash

 

39

5,123

12,278

8,576

14,063

11,809

Other items (including cash assumed on acquisition)

0

0

439

0

0

0

Closing cash

 

5,123

12,278

8,576

14,063

11,809

9,062

Opening net debt/(cash)

1,724

13,476

24,742

65,435

67,954

66,971

Closing net debt/(cash)

13,476

24,742

65,435

67,954

66,971

67,682

Source: Company data, Edison Investment Research

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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues