A property stock that might have bottomed out

The sharp fall in UK inflation and softening of government bond yields is welcome news for Aim-traded property development and investment group Conygar (CIC:85p).

In the 12 months to 30 September 2023, Conygar reported a hefty pre-tax loss of £31.2mn after completely writing down the £5.2mn carrying value of a site in Holyhead as well as taking a £21.3mn valuation downgrade on undeveloped land at its flagship The Island Quarter site in Nottingham. It is now valued at £29.5mn (49.5p). Land price valuations tend to be volatile and are highly sensitive to small changes in underlying assumptions in key parameters, such as rental levels, net initial yields, construction costs, finance costs and voids.

Bearing this in mind, as the economic environment improves and inflation deflates, expect a rebound in land prices especially as the Nottingham development is targeting privately built student accommodation (PBSA), build-to-rent and life science sectors, market segments that have supply shortages and strong end-user demand to support improved future pricing.

The hit on land valuations was partially offset by an uplift on the group’s 693-bed PBSA block that is under construction at The Island Quarter. Completion is scheduled for May 2024 ahead of the autumn Nottingham University intake. Conygar has tapped £17.2mn of a £47.5mn development loan facility with Barclays secured on the building to partly fund the development costs. The asset is held in the books at £65.6mn (110p) and accounts for 59 per cent of the group’s £110mn (185p) investment portfolio. The building should deliver net rental income of £5.5mn, implying an investment yield of 6 per cent on open market prices when fully let and a loan to value ratio of around 50 per cent after factoring in the remaining build costs. In the coming months, the directors plan to submit a planning application for the second phase of student accommodation, comprising 400 beds.

The board is also progressing discussions with a tenant looking to take significant space in a 249,000 sq ft bioscience development on the same site, as well as with an investor to forward fund the development.

Funding position

Post the financial year-end, Conygar raised £15mn through an issue of five-year zero income preference shares, which have a gross redemption yield of £12mn. In addition, the group has recently completed a £12mn two-year loan facility with real estate funding specialist ASK Partners at a margin of 5.9 per cent above Bank of England base rate.

The new funds will be used to progress both The Island Quarter development and a proposed redevelopment of the 14.7-acre site where the Bristol Fruit Market is currently located. Completion of the Bristol site purchase is conditional on the tenants vacating by April 2024 and is subject to planning permission being granted for several development options by June 2025.

Clearly, the land value write-downs are disappointing, but they are more than priced in with the share price trading on a 47 per cent discount to what could well prove to be trough NAV. Furthermore, the equity held in the Nottingham PBSA building backs up all Conygar’s market capitalization of £50mn, effectively leaving £47.5mn of assets in the price for free including £29.5mn of land at the site.

So, although the shares have lost more than a third of their value this year in a very weak market for micro-cap companies, and are the laggard in my 2022 Bargain Shares Portfolio, there is potential for positive newsflow on the development projects to drive a narrowing of the share price discount to NAV. Furthermore, the post year-end softening of UK government bond yields is supportive of attracting development funding as well as portfolio valuations. Recovery buy.

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.