Raven Russia — Update 31 August 2016

Raven Property Group (LSE: RAV)

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Research: Real Estate

Raven Russia — Update 31 August 2016

Raven Russia

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Written by

Real Estate

Raven Russia

Robust performance and financial strength

2016 interim results

Real estate

31 August 2016

Price

36.00p

Market cap

£242m

£/US$1.3150

Net debt* (US$m) at 30 June 2016
*Excludes preference shares of $141.9m

702.9

Shares in issue

672.3m

Free float

90%

Code

RUS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.3)

9.9

(16.3)

Rel (local)

(6.9)

2.0

(22.7)

52-week high/low

43.8p

28.9p

Business description

Guernsey-based Raven Russia invests, for the long term, in modern, high-quality warehouse properties in Russia, with the aim of delivering attractive distributions to shareholders over time. The company’s ordinary and preference shares are listed on the main market of the LSE.

Next events

FY16 results

March 2017

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

Julian Roberts

+44 (0)20 3077 5748

Raven Russia is a research client of Edison Investment Research Limited

Market conditions, echoing economic developments, show signs of stabilising and occupancy levels have held at 82% over the period, in line with our forecast. The company’s active leasing efforts, aimed at defending income and cash flow, have dealt with the majority of the 2016 lease maturities. Costs are being contained and the cash balance has remained strong even before July’s £109m issue of convertible preference shares. Raven is well placed to navigate current market conditions and seize opportunities in an upturn.

Year
end

Revenue ($m)

NOI*
($m)

EPS**
(c)

Adj. NAV***
(p)

DPS
(c)

P/adj. NAV***
(x)

Yield
(%)

12/14

257.6

192.3

8.94

80

6.0

0.45

12.7

12/15

219.7

174.1

7.94

53

2.0

0.68

4.2

12/16e

192.6

150.8

7.76

54

1.0

0.67

2.1

12/17e

182.5

141.4

5.45

56

1.0

0.64

2.1

Note: *NOI is net operating income. **EPS is underlying and fully diluted, excluding valuation movements, depreciation, share-based payments and exceptional items. ***NAV is underlying and fully diluted, excluding goodwill, deferred tax on valuation gains, fair value movements on derivative contracts and cumulative FX movements on preference shares. Both underlying and fully diluted EPS and NAV exclude the convertible preference shares.

Strategy on track in H116

H1 net operating income of $77.0m is only slightly down on the $78.7m of H215. Of the 228k sqm of 2016 maturities at 1 January, just 75k sqm remains to be dealt with, while occupancy has been maintained. Costs have fallen and FX movements were a positive $10.5m, limiting the decline in underlying PBT, $34.6m versus $39.9m in H115. Property revaluation generated only a small negative adjustment and adjusted NAV was stable at $0.70 versus year end. An interim distribution of 1p by way of a tender offer is proposed. The healthy half-year cash balance of $183m has been strengthened further by July’s £109m convertible preference issue, providing additional financial flexibility. Having entered the Russian economic and currency crisis in good shape, Raven’s cautious strategy, aimed at maximising cash flow and paying down debt, positions it well for a turn in the market.

Market environment stabilising

The rouble and oil prices have been strengthening and recent GDP data have shown faster than expected improvement. Expectations are that the decline in Russian GDP will end this year with a recovery beginning in 2017. Future new warehouse supply should be constrained by market rents being currently below replacement cost while demand for space continues, making for an improving demand-supply balance in a market that appears structurally under-penetrated. Our forecasts for underlying PBT increase quite materially due mainly to lower costs (see page 7), with positive cash flow sufficient to reduce net debt and meet modest continued distributions and potential for distribution upside.

Valuation: Support pending market recovery

Our forecast 1p distribution is a 2.1% yield, while the c 33% discount to NAV provides additional comfort. Given balance sheet strength, we see potential for distribution upside, especially if the rouble/oil price rally continues. At 130p, the preference shares yield is a little over 9% on a fixed coupon.

Investment summary

Coming into 2016 management was realistic about the harsh environment that the company was facing; the financial results for the six months to 30 June 2016 have met its expectations, and have beaten our own on costs and finance expense, with FX gains in addition. Market conditions, echoing economic developments, appear to be stabilising, and occupancy levels have held at 82% over the period, in line with our expectations. The company’s active leasing efforts, aimed at defending income and cash flow, have dealt with the majority of the lease maturities due in 2016. Cost containment measures are bearing fruit, and defensive management of the balance sheet saw strong cash balances maintained ($183m at 30 June compared with $202m at 31 December 2015, despite ongoing debt repayments of more than $30m in the half year). Following the issue of c £109m of new convertible preference shares in early July, the cash balance at the date of the interim report has increased to $331m, providing considerable flexibility for liability management in the coming months, and providing scope to benefit as the market recovers, rebuilding the company’s top line through acquisitions and development as and when opportunities arise.

We have made little change to our assumptions for portfolio rental income as a result of these results, but our estimates are increased to reflect lower costs and financing charges, incorporating the recently issued convertible preference shares.

Key features of the 2016 interim results

Net operating income reduced as expected, to $77.0m in H116 compared with $95.5m in H115 and $78.7m in H215. The main movement was seen in the Property Investment division, reflecting lower average occupancy year-on-year and the gradual adjustment to current (lower) market rents on renegotiated leases and new lettings. Property portfolio NOI declined by $17.7m year-on-year to $72.3m, while the logistics subsidiary Roslogistics saw a decline of $0.3m (to $4.8m) entirely explained by translation effects on its rouble-denominated revenues (we estimate c 15% growth in rouble-denominated NOI). The rouble averaged c 70 to the US$ in H116, compared with c 58 in H115.

At 1 January, 2016 contractual lease maturities were 228k sqm. As shown in Exhibit 3 below, only 75k sqm of this remains, with 82k sqm renegotiated and extended and 78k sqm of terminations/vacations offset by 85k sqm of new letting for various maturities, 75k sqm for more than two years. A further 25k sqm is subject to pre-letting agreements (PLAs) or letters of intent (LOIs). Rouble-denominated or capped leases now account for 27% of let space at an average of RUB5,000 per sqm with an average minimum annual rent indexation of 7% pa.

Administrative expenses were tightly controlled, declining from an underlying $17.6m in H115 to $10.5m in H116 (H215 $12.5m). Part of the improvement is the result of the H115 bad debt charge of $2.5m (H215 $1.2m) reversing to a positive $0.9m recovery in H116. Adjusting for bad debts, admin expenses were $11.4m in H116, down from $15.0m in H115 and $11.2m in H215. The improvement was partly offset by a $2.3m charge for the cash element of the long-term incentive scheme, which arises from a revision approved at the AGM in June.

Included within underlying profits, P&L FX movements were a positive $10.3m (H115 a positive $2.0m), a result of the changed value of US$ cash reserves into the sterling functional currency. The FX gain, together with lower costs, saw underlying operating profits at $75.2m versus $80.6m in H115 (H215 $67.2m).

There is little movement in the mid-year external property valuation, with a small negative revaluation movement of $8.5m compared with $257m for 2015 as a whole.

Net financial costs were little changed on an underlying basis ($40.5m versus $40.7m in H115), with the average level of total debt similarly little changed. On a reported basis, financial costs include derivative fair value movements and amortisation of loan issue costs.

Underlying PBT was $34.6m versus $39.9m in H115. Adjusted for FX movements, which are part of reported underlying profits, PBT fell from $37.9m to $24.3m but held up well compared with the $25.8m reported in H215. Underlying EPS on a fully diluted basis was 4.76 cents compared with 4.90 cents in H115. Fully diluted adjusted NAV per share was unchanged compared with the year end at 70 cents or 54p at a rate of £/US$1.315.

As indicated above, the cash balance remained strong at $183m compared with $202.3m at year end. A 2015 final distribution of c $9.6m by way of a tender offer was made during the period and a distribution of 0.5p per share in respect of H116 has been proposed (c $4.4m at the current exchange rate), also to be made by way of a tender offer buy back of 1 in 80 shares at 40p.

On 7 July Raven completed the placing of new convertible preference shares at £1 per share, raising $109m. These shares have a 10-year term, a cumulative preference dividend of 6.5% pa, and may be redeemed on maturity at £1.35. The holders have the right to convert to ordinary shares at the equivalent of 55p per ordinary share at maturity. The shares have been listed on the Channel Islands Securities Exchange and trade on the SETSqx platform of the London Stock Exchange.

Market environment stabilising

The Russian economy saw its slowest pace of contraction in Q2 of this year since the crisis began. Preliminary estimates released by the government in early August show a better than expected 0.6% year-on-year decline, half the rate recorded in Q1. There are indications that investment spending may be reaching a turning point after a severe contraction, although household consumption remains weak. The data support the general trend of economic forecasts for the economy to stabilise during 2016 and begin to grow again in 2017, despite ongoing international sanctions. The Russian Central Bank looks for a positive GDP reading in Q3 and for a 0.3-0.7% contraction for the year as a whole, before growing 1.1-1.4% in 2017. In its January 2016 update, before the recent improvement in oil prices, the World Bank forecast a 0.7% decline this year and growth of 1.3% next; the IMF World Economic Outlook update (also from January) follows a similar pattern of expectations (-1% and then +1%).

There are signs that the worst effects of the rouble devaluation have fed through to inflation, with annual CPI inflation at the lowest level for more than two years in July at 7.2%. The decline in inflation suggests growing room for the Central Bank to reduce policy interest rates from the current 10.5%.

The Brent crude oil price has recently been trading at around $50 per barrel compared with less than $30 in January, while the rouble has recovered to around 65 roubles per US$ from more than 80 earlier in the year.

Exhibit 1: Rouble vs US$

Exhibit 2: Brent crude oil in US$

Source: Bloomberg

The weakness of the economy (GDP shrank by 3.7% during 2015) had the effect of reducing the demand for new lettings and the opportunities to renew existing leases, and has put downward pressure on market rents. The rouble weakness (it remains at almost half its mid-2014 level versus the US dollar) put enormous pressure on tenants with US dollar-pegged leases, with some simply unable to cope and others opting for rouble-denominated rents at levels where the US dollar equivalent is well below the levels previously seen in the market, albeit indexed to Russian inflation.

These negative effects of economic weakness were exacerbated by a significant amount of new supply during 2014, already in development when the crisis hit, being delivered to market. The majority of this space was developed speculatively with no end-tenant in place. In 2014, c 1.6m sqm of new modern warehouse space was completed in the Moscow region (75% of the Raven portfolio), according to JLL. This 16% increase on the 9.6m sqm opening stock had been planned in the context of a structurally undersupplied market with persistent low vacancy and a low ratio of warehouse space per capita relative to other major European locations. New supply continued at a high level into 2015 as projects that could not be shelved were completed, adding an additional c 800k sqm. The market vacancy rate increased from 7.9% at the end of 2014 to an estimated 10.5% at the end of 2015 according to JLL.

Although new supply in H116 has slowed to roughly half the level of H115, JLL estimates that for 2016 as a whole supply will actually increase on 2015 (by c 18%), although much has either been leased or sold at an early stage of construction. Take-up of space has continued (JLL estimates c 800,000 sqm for 2016), with large retailers in particular seeking to improve their supply chains.
E-commerce is expanding with traditional retailers reporting strong growth in online sales, which should support demand for well-located warehouses around the major cities. Nevertheless, JLL forecasts the vacancy rate to end the year higher than 2015 at 11.0-11.5%.

Rent pressure has been greatest in the market for new tenants, where developers are forced to compete aggressively so as to be able to let space. For existing tenants, contractual lease terms provide some friction to the adjustment process and in lease renegotiations any decision to move rather than renew must include the consideration of the costs and difficulties involved in moving and re-training staff, and possible disruptions to supply chains and existing business.

Across all sectors rents are for now rouble-denominated for new lettings, although the majority include indexation to Russian CPI. JLL estimates that the average level of Class A prime rents on existing leases was c $80 per sqm at 30 June 2016, down from c $100 at the end of 2015. It estimates that new rouble rents have been fairly stable at c RUB4,200 per sqm, and that rents will be similar through H216.

Update on leasing and NOI forecast

When the Russian economic crisis hit, management turned its focus to defending occupancy and cash receipts by aggressively renegotiating near-term maturing leases, and this has continued into 2016. 2016 contractual lease maturities at 1 January 2016 were 228k sqm, or c 19% of the let space. The majority of these have already been dealt with during H116 and overall contractual occupancy has remained unchanged since year end at 82%. 82k sqm of the 2016 maturities have been renegotiated or extended and 119k sqm in total across all maturities. 78k sqm of 2016 maturing space has been vacated by the tenants or terminated by Raven (usually because it is unhappy with the strength of the tenant covenant). A small amount of maturities for later years have similarly been terminated. 85k sqm of space has been newly let for various maturities, but 75k sqm of this is for a term of two years or more. 75k sqm of 2016 maturities remain to be dealt with in H216.

Exhibit 3: Updated lettings summary (30 June 2016)

Maturities (000s sqm)

2016

2017

2018

2019

2020-27

Total

Profile at 1 January 2016

228

210

131

225

429

1,223

Renegotiated & extended

-82

-25

0

-12

0

-119

Effect of renegotiations

0

45

33

11

30

119

Vacated/terminated

-78

-6

-3

0

0

-87

New Lettings

7

3

34

12

29

85

Profile as at 30 June 2016

75

227

195

236

488

1,221

Source: Company data, Edison Investment Research

73% of the let warehouse space remained on US$ denominated leases as at 30 June, with an average warehouse rental level of $124 per sqm, and a weighted average term to maturity of 3.4 years. The 27% of let space that is now on rouble rents is at an average RUB5,000 per sqm with a weighted average term to maturity of two years, and an average annual indexation of a minimum 7% pa. The recent strengthening of the rouble versus the US$ is beneficial to Raven.

In our note of 4 April 2016 we set out our estimates for future rents and NOI in detail. Our starting point was the end-2015 portfolio contracted NOI of $162m and we modelled the potential future direction of NOI according to assumptions about Raven’s ability to extend, renegotiate, or re-let maturing space at maturity and at what level of rent. Raven has not provided a portfolio NOI update for the half year, but we note that H1 NOI recorded in the P&L was very close to our estimates ($77.0m versus a forecast $76.3m), that period-end occupancy of 82% matches that assumed in our modelling and that evidence on the level of new rents appears consistent with our assumptions. For this reason, we are making no changes to our Investment Property NOI forecasts for H216 or 2017. For convenience, we repeat our forecast framework below.

We assume that 75% of maturing space will see leases renewed with no void period.

We assume there will be a six-month lag in re-letting the 25% of maturing space that does not renew at maturity.

For both renewals and re-lettings, we assume rents equivalent of $75 per sqm in 2016 and H117, based on the then $/RUB70, applied to a blend of rents between c RUB4,500 per sqm for new leases to new tenants and c RUB6,000 per sqm for renewing leases for existing tenants who are likely to wish to avoid the cost and disruption of moving. The average was R5,250 per sqm. From H217 we assumed there is some normalisation of the market with longer maturity leases being fixed at the equivalent of $100 per sqm.

We also assumed that occupancy would begin to improve from H117, after holding steady at an average 82% in 2016. In modelling terms we assumed that from H117, new leases would be equal to the space vacated six months earlier, plus 2.5% of the overall portfolio (ie a 5% pa vacancy reduction).

For the P&L account, we assumed a constant $15m pa deduction from the contracted NOI to make allowance for the internal use of space by Roslogistics (eliminated on consolidation) and some indeterminate amount of PLA/LOIs that will not immediately generate revenue.

By way of illustration, we extended this analysis beyond our earnings forecast period (2016-17) and out to 2020, by which time an implied c 86% of the portfolio would have transitioned to the assumed new rent levels. We called this an illustration rather than a forecast because we were conscious that, this far out, the actual outcome may well differ materially, either positively or negatively. The key downside sensitivities are a faster migration to the new lower market rent level than we have assumed, lower market rents than assumed, or higher vacancy. As a result of the assumption of improving occupancy from H117, the illustration showed NOI increasing from 2018 despite continued migration of the portfolio from higher, historic contracted rent levels to the lower levels assumed. We will look to refresh the analysis as new portfolio NOI data become available.

Financials and estimate revisions

The underlying interim results are very much in line with our expectations at this stage from an operating point of view, although costs are somewhat lower and our forecasts had not assumed the positive FX movement. Financial expenses were also lower than we had allowed for (a larger positive debt cost amortisation adjustment) such that overall underlying operating earnings were well ahead of our forecasts. The details are shown in Exhibit 4 below.

Exhibit 4: H116 underlying earnings versus implied forecast*

US$m

Edison Forecast

Actual

Diff.

Gross revenue

97.9

97.7

-0.2

Property operating expenditure & cost of sales

-21.6

-20.7

0.9

Net rental and related income (NOI)

76.3

77.0

0.7

Administrative expenses

-13.7

-10.5

3.3

Share-based payments and other long term incentives

0.0

-2.3

-2.3

FX losses

0.0

10.3

10.3

Share of profit of joint ventures

0.5

0.7

0.2

Operating profit/(loss) before realised/unrealised property gains

63.1

75.2

12.1

Realised/unrealised gains on investment property & property under construction

0.0

0.0

0.0

Operating profit

63.1

75.2

12.1

Net finance expense

-43.7

-40.5

3.2

Charge on preference share conversion

0.0

0.0

0.0

Profit before tax

19.3

34.6

15.3

Tax

-2.1

-3.3

-1.2

Profit after tax

17.2

31.4

14.2

Source: Company data, Edison Investment Research. Note: *H116 forecast not published, but contained in FY16 estimate.

As discussed above, the cost improvement is partly explained by the move from bad debt provisions to recovery, but expenses were nonetheless better than we had thought and we have reduced these quite significantly (by c $5m for FY17) in our full year estimates, as shown below. We have also reduced our future full year financial expenses, adjusting for the convertible preference issue, part of which will be used to repay more expensive bank debt; underlying finance costs also benefit from an increased adjustment for debt cost amortisation. In combination with the H1 FX gain, the change to our underlying EPS is material.

Exhibit 5: Estimate revisions

NOI* ($m)

EBIT ($m)

EPS** (c)

DPS (p)

NAV per share*** (p)

Old

New

% change

Old

New

% change

Old

New

% change

Old

New

% change

Old

New

% change

2016e

150.1

150.8

0.5

119.8

131.1

9.4

5.01

7.76

55.1

1.00

1.00

0.0

0.50

0.54

7.7

2017e

140.7

141.4

0.5

109.4

114.8

4.9

4.09

5.45

33.2

1.00

1.00

0.0

0.52

0.56

8.9

Source: Company data, Edison Investment Research. Note: *Net operating income. **Underlying and fully diluted, excluding valuation movements, depreciation, share-based payments and exceptional items. ***Underlying and fully diluted, excluding goodwill, deferred tax on valuation gains, fair value movements on derivative contracts and cumulative FX movements on preference shares.

As the conversion terms for the newly issued convertible preference shares are above the current NAV per share, there is no dilution on NAV level.

As indicated above, the changes to our NOI estimates are immaterial. For property investment, we allow for the small H1 beat versus our forecast, but future periods are unchanged. Roslogistics NOI is slightly increased by a strong underlying rouble performance and a slightly improved assumed translation rate into US$.

Exhibit 6: Divisional NOI summary

(US$000s)

2014

2015

2016e

2017e

Property investment gross revenues

230,108

202,287

175,472

163,765

Property investment net operating income

174,541

162,678

140,995

131,012

Roslogistics gross revenues

24,399

15,267

15,940

16,737

Roslogistics net operating income

15,793

8,972

9,144

9,422

Raven Mount gross revenues

3,089

2,151

1,181

2,000

Raven Mount net operating income

1,974

2,474

684

1,000

Group total gross revenues

257,596

219,705

192,593

182,502

Group total net rental and related income

192,308

174,124

150,822

141,435

Source: Company data, Edison Investment Research

As usual, our forecasts assume no future revaluation movements on the property assets and no FX impacts.

We continue to allow for a small income distribution of 1p per year (0.5p in H216), anticipating that management will wish to maintain a distribution while continuing to focus on maintaining a strong balance sheet until a clearer market picture emerges. As always, we model this as a cash payment, although we would anticipate that continuing distributions by way of tender offer are more likely.

Exhibit 7: Key financial data – profit & loss account

(US$000s)

2014

2015

2016e

2017e

Gross revenue

257,596

219,705

192,593

182,502

Property operating expenditure & cost of sales

-65,288

-45,581

-41,771

-41,067

Net rental and related income

192,308

174,124

150,822

141,435

Administrative expenses

-34,630

-30,494

-23,335

-24,640

Share based payments and other long term incentives

-2,354

-3,594

-7,900

-3,000

FX losses

-15,471

1,223

10,283

0

Share of profit of joint ventures

955

2,518

1,197

1,000

Operating profit/(loss) before realised/unrealised property gains (EBIT)

140,808

143,777

131,067

114,795

Realised/unrealised gains on investment property

-145,404

-256,548

-8,465

0

Operating profit

-4,596

-112,771

122,602

114,795

Net finance expense

-93,448

-92,284

-86,834

-82,295

Charge on preference share conversion

0

0

0

0

Profit before tax

-98,044

-205,055

35,768

32,499

Tax

9,855

12,697

-10,057

-3,900

Profit after tax

-88,189

-192,358

25,711

28,599

EPRA adjustments

Realised/unrealised gains on investment property

145,404

256,548

8,465

0

Profit on maturing forward derivatives

-700

0

0

0

Change in fair value of derivatives

6,362

5,205

3,956

0

Movement in deferred tax thereon

-8,205

-24,562

2,033

0

EPRA earnings

54,672

44,833

40,165

28,599

Company underlying earnings (net, exc pref conversion charge)

66,652

54,560

51,709

36,339

Reported EPS - fully diluted (c)

-11.83

-27.99

3.86

4.29

EPRA EPS - fully diluted (c)

7.78

6.69

5.88

4.35

Company underlying EPS - fully diluted (c)

8.94

7.94

7.76

5.45

Distributions per ordinary share (p)

6.00

2.00

1.00

1.00

Period end number of shares (m)

737.6

682.6

663.9

663.9

Period end number of shares exc own held (m)

688.5

644.1

657.2

657.2

Average number of shares (m) - basic

715.0

666.8

656.2

657.2

Average number of shares (m) - fully diluted

745.5

687.2

665.9

667.0

Source: Company data, Edison Investment Research

The balance sheet shows no material moves during H1. Property revaluation was small, cash balances remained high and debt amortisation continued ($33.7m repaid in the period). In 2015 significant negative property revaluation pushed up the ratio of debt to portfolio value, with gross bank debt (excluding preference shares) increasing to 66.9% of property assets versus 54.4% in 2014. Total net debt (including unencumbered preference shares and cash) also increased, but was lower due to the high cash balance. Exhibit 8 shows the improvement in H116, with continuing positive cash flow to finance debt amortisation, and also shows our estimate for the H216 position, assuming that $100m of the £109m raised from the convertible preference share issue is used to refinance existing bank debt. By the end of 2016, the ratio of gross bank debt to property assets should be back to more comfortable levels, similar to 2014.

Exhibit 8: Debt as a percentage of property assets

Source: Company data, Edison Investment Research

Our cash flow analysis in Exhibit 10 shows forecast net debt declining further through 2017 despite the continued pressure on NOI that we have factored in.

Our forecasts indicate a stabilisation in the ratio of period-end contracted NOI to bank interest expense in 2016 at c 2.2x (2015: 2.3x) and an improvement to c 2.5x in 2017.

Exhibit 9: Key financial data – balance sheet

(US$000s)

2014

2015

2016e

2017e

Investment property

1,593,684

1,333,987

1,331,941

1,334,941

Investment property under construction

47,958

39,129

39,776

39,776

Goodwill

2,375

2,245

2,036

2,036

Derivative financial instruments

6,853

5,585

1,402

1,402

Deferred tax asset

35,766

6,145

7,354

7,354

Other non-current assets

58,888

43,631

43,385

43,385

Total non-current assets

1,745,524

1,430,722

1,425,894

1,428,894

Inventory

1,389

1,381

1,258

1,258

Trade & other receivables

52,623

50,264

54,457

54,457

Derivative financial instruments

432

233

82

82

Cash & equivalents

171,383

202,291

217,960

197,828

Total current assets

225,827

254,169

273,757

253,625

Total assets

1,971,351

1,684,891

1,699,651

1,682,519

Trade & other payables

84,962

53,384

54,112

54,112

Derivative financial instruments

1,253

2,097

1,451

1,451

Interest bearing loans & borrowings

55,252

104,724

50,000

50,000

Total current liabilities

141,467

160,205

105,563

105,563

Interest bearing loans & borrowings

837,429

814,021

715,866

675,866

Preference shares

164,300

156,556

141,897

141,897

Derivative financial instruments

4,153

1,794

618

618

Deferred tax liabilities

89,118

55,619

61,527

61,527

Other non-current liabilities

37,595

31,653

172,022

172,022

Total non-current liabilities

1,132,595

1,059,643

1,091,930

1,051,930

Total liabilities

1,274,062

1,219,848

1,197,493

1,157,493

Net assets (and shareholders' equity)

697,289

465,043

502,158

525,027

NAV adjustments

Goodwill

-7,806

-5,134

-6,692

-6,692

Deferred tax on revaluation gains

55,250

0

0

0

Cumulative FX loss on preference shares

13,955

4,956

-9,608

-9,608

Fair value of derivatives

-5,322

-5,159

-1,048

-1,048

Adjusted NAV

753,366

459,706

484,810

507,679

Fully diluted NAV per share (c)

1.10

0.72

0.74

0.77

Adjusted fully diluted NAV (c)

1.06

0.70

0.72

0.76

Fully diluted NAV per share (£)

0.84

0.55

0.56

0.59

Adjusted fully diluted NAV (£)

0.80

0.53

0.54

0.56

Source: Company data, Edison Investment Research

Exhibit 10: Key financial data – cash flow

(US$000s)

2014

2015

2016e

2017e

Profit before taxation

-98,044

-205,056

35,768

32,499

Adjustments for:

Depreciation, goodwill impairment, and amortisation

5,224

1,599

1,114

1,140

Provision for bad debt

3,720

-712

0

Share of profits of joint ventures

-955

-2,518

-1,197

-1,000

Revaluation of investment properties/properties under construction

145,404

256,548

8,465

0

Share based payments

2,354

3,594

5,574

3,000

Net interest expense

93,448

92,284

86,834

82,295

Other including loss on disposal, inventory write-down, FX, and preference conversion charge

15,480

-1,223

-10,283

0

Receipts from joint ventures

983

3,954

1,194

1,000

Working capital changes

9,845

-8,020

-11,353

0

Tax paid

-4,945

-8,731

-5,496

-3,900

Net cash generated from operating activity

168,794

136,151

109,908

115,035

Payments for investment property under construction

-105,582

-20,028

-4,369

0

Property improvements & movements in completion provisions

0

0

-1,500

-3,000

Acquisition of subsidiary undertakings, net of cash acquired

-12,873

0

0

0

Interest received

3,208

2,909

2,705

2,200

Other investing activity

16,353

29,986

-465

-1,140

Net cash generated from investing activity

-98,894

12,867

-3,629

-1,940

Bank borrowing costs paid

-70,979

-69,465

-66,848

-58,178

Exercise of warrants

524

177

4

0

Net own shares (acquired)/disposed

-68,928

-41,906

4,406

0

Issue of preference shares

0

0

0

0

Ordinary dividends

0

0

0

-8,731

Pref dividends

-18,225

-17,156

-16,073

-17,028

Convertible pref share dividend

0

0

-2,323

-9,290

Issue of convertible preference shares

0

0

142,927

0

Other investing activity

-3,610

-5,107

-780

0

Change in net debt from investing activity

-161,218

-133,457

61,314

-93,226

Other items

-20,288

-2,975

-127,311

0

Change in net debt

-111,606

12,586

40,282

19,869

Opening net debt

773,995

885,601

873,015

832,733

Closing net debt

885,601

873,015

832,733

812,864

Source: Company data, Edison Investment Research

Valuation

Raven’s strategy has focused on growing income and shareholder distributions. The Russian financial crisis has necessitated a reduction in distributions per share from a peak of 6p per share in 2014 to 2p in 2015 and we forecast 1p in 2016 and 2017. The current strategy remains highly defensive, focused on maximising cash flow, with a greater emphasis on long-term security and debt reduction. This strategy, and the support of shareholders in funding the convertible preference share issue, leave Raven well placed to navigate current market conditions and seize opportunities in an upturn. As a result, we believe that a long-term investment in Raven will remain very much about cash flow and yield.

Yield

As discussed above, we forecast ordinary share distributions of 1p per share for 2016 and 2017. In part, the forecast decline reflects our expectation of lower profitability and cash flow, but it also reflects prudence as Raven continues to target debt reduction and a healthy cash balance.

Exhibit 11: Net operating income after interest payments

2014

2015

2016e

2017e

Net cash generated from operating activities

168,794

136,151

109,908

115,035

Interest received

3,208

2,909

2,705

2,200

Bank borrowing costs paid

-70,979

-69,465

-66,848

-58,178

Pref dividends

-18,225

-17,156

-16,073

-17,028

Convertible pref dividends

0

0

-2,323

-9,290

Total net operating income after interest

82,798

52,439

27,370

32,739

Per share total net operating income after interest (p)

8.4

5.8

3.1

3.7

Distribution per ordinary share (p)

6.0

2.0

1.0

1.0

Source: Edison Investment Research

Exhibit 11 shows our expectations for operating cash flow net of tax and after interest payments (both bank debt and fixed preference share coupons). These have increased slightly with our earnings forecast increase. Our expectation is that it will remain healthily positive and well in excess of the modest distribution that we forecast. However, this is before debt amortisation, which has been running at c $60m pa but which we expect to reduce to c $40m pa as a result of the convertible preference share issue bank debt refinancing. As a result, it would be possible for Raven to increase the payout of free cash flow, making distributions ahead of our forecast, without eating into its high cash balance. At the current share price, this forecast 1p distribution would represent a yield of c 2.1%.

The preference shares earn a cumulative dividend of 12% pa payable on the fixed-issue amount per share of 100p. These illiquid shares last traded at a price of 130p, which represents a prospective yield of a little more than 9%.

NAV

The NAV per share, on a diluted IFRS basis at 30 June, was $0.72, up from $0.70 at the year end. On a fully diluted adjusted basis it was $0.70. Using a £/$ exchange rate of 1.3150, the equivalent fully diluted adjusted NAV in sterling is 54p and the P/NAV 0.67x. However, we do not consider P/NAV to be the main driver of share price or best indicator of value. The investment market in Russia remains relatively immature, making portfolio values more volatile.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Raven Russia 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.
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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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Raven Russia 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 2016. “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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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