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Why Resilient company stocks are overvalued

Regardless of the Viceroy rumours.
Rumours that Viceroy was releasing a damning report on Resilient’s finances sent its share price and that of its associate companies – including Greenbay, Nepi Rockcastle and Fortress – falling by as much as 19% over the last two weeks. Picture: Moneyweb.

After wild swings in the share price of the Resilient group of companies over fears that they may be the next target of activist short-sellers Viceroy Research, market watchers have questioned whether these stocks have become expensive and frothy.

Rumours that Viceroy was releasing a damning report on Resilient’s finances sent its share price and that of its associate companies – including Greenbay, Nepi Rockcastle and Fortress – falling by as much as 19% over the last two weeks.

Viceroy, which bills itself as a shareholder activist, gained prominence after calling out embattled retailer Steinhoff for accounting fraud and other financial irregularities.  

Read:

From social worker to Steinhoff win

Identity of individuals behind Viceroy Research revealed

Although Viceroy doesn’t mention its research targets in advance, it said via a tweet on December 29 that it plans to release reports on three companies with one of them being an SA company. The rumour mill suggested that Viceroy had its eyes on Resilient itself, Greenbay, Nepi Rockcastle and Fortress, unleashing panic selling in these stocks by January 11.

Speculation mounted that Viceroy could raise concerns over the Resilient corporate structure, overpaying for property assets in Central and Eastern Europe or that the companies own property and shares in each other, which may make it easy to conclude deals that are not in the interest of shareholders. Resilient owns 16.05% of Fortress, which in turn owns 9.83% of Resilient. Resilient is also a shareholder in Nepi Rockcastle and Greenbay, owing 8.9% and 16% respectively.

For now, it appears that money managers are supportive of the Resilient companies as they have not yet found evidence of wrongdoing.

Fayyaz Mottiar, the head of property at Absa Asset Management, finds it strange that real estate stocks were the target, questioning how they could be involved in accounting irregularities as grandiose as that of scale of Steinhoff.  “With property companies, you can see the cash that goes in and out. It would be difficult to rig cash flow from rental income,” said Mottiar.

The Resilient group of companies was founded by former banker Des de Beer and developers Barry Stuhler and Jeff Zidel. They began making property investments in township shopping malls and commercial properties in SA and the rest of Africa from 2002 through Resilient and Fortress.

The three developers were the first to make a foray into Romania and former communist Central and Eastern Europe countries ten years ago through New Europe Property Investments, which merged with Rockcastle in 2017 to create Nepi Rockcastle. They also backed Greenbay, which focuses on shopping centres in Central and Eastern Europe.

But the market is questioning the punchy valuations the Resilient company stocks are fetching. At the time of writing, shares of Resilient, Nepi Rockcastle and Fortress were trading at a premium to their net asset values (NAVs) of between 3% and about 80% (see below).

Company

Share price as of Jan 19

 Company reported net asset value

Premium to NAV

Fortress A

R17.35

R16.89 (As at June 2017)

2.72%

Fortress B

R35.35

R27.78 (As at June 2017)

27.24%

Nepi Rockcastle

R168.80

R94.02 (As at March 2017)

79.47%

Resilient

R123.74

R91.40 (As at June 2017)

35.38%

Source: Moneyweb

Even with the panic selling sparked by the Viceroy jitters, the stocks of Resilient-linked companies are overvalued relative to their local and international peers, said Garreth Elston, an analyst at Golden Section Capital. Given the quality and growth of earnings, quality of the portfolio and rental escalations, some of the stocks are out of the range Elston views as prudent.

For example, he ascribes a fair value range of between R82.93 and R87.18 versus the actual Resilient share price of R123.74 (see other valuations below).

Company

Share price as of Jan 19

Golden Section Capital justified price range

Fortress A

R17.35

R15.64 to R16.45

Fortress B

R35.35

R26.70 to R28.07

Greenbay

R1.97

R1.26 to R1.33

Nepi Rockcastle

R168.80

R103.28 to R108.58

Resilient

R123.74

R82.93 to R87.18

Source: Golden Section Capital

Lawrence Koikoi, a portfolio manager at Stanlib, said the stocks are trading at a premium for good reasons, arguing that management has consistently delivered on property fundamentals including long lease profile properties, long debt maturity profiles, low vacancy rates and the right properties in the right locations.

“This has all led to the lower cost of capital which provides financial headroom to reinvest into their existing properties and make earnings-enhancing acquisitions or developments. This, in turn, leads to above-average growth in earnings and dividends,” Koikoi said.

“The market has accordingly appraised management for these good attributes and hence the group is generally trading at a premium to underlying NAVs.”

On dividends, Resilient indicated that its dividends for the six months ended December 2017 would be 13% to 13.5% higher year on year, while Fortress expects interim dividends to growth as much as 15.5% for its B shares. Greenbay expects dividends to grow by 25% in the next two years and 20% thereafter. 

“Excluding any evidence of what is going on from Viceroy, management has delivered over the years what they have promised. They are an aggressive company and do make sure that investors know what is going on,” said Elston.

In addition to the management of the Resilient group having the ability to asset manage properties to deliver strong earnings and dividends, Absa’s Mottiar said debt levels of the companies are manageable.  Resilient itself, Greenbay, Nepi Rockcastle and Fortress have loan-to-values of between 10% and up to 27%, which is below the 30% industry average. 

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Hi Ray

Are the loan to values you are quoting in the last paragraph based on the implicit net market / share price value or the computed NAV?

Or is it neither which means you are using another valuation methodology?

Rockcastle is a holds shares of property companies that are geared themselves. If you bring through the total debt in all the portfolio companies (pro rata) divided by the underlying value of the assets themselves, you will be in for a big surprise. Properties don’t deliver those returns without leverage.

The returns are extraordinary on such low debt levels.

So Ray it is important that you define how the Loan to value was derived – more particularly the value component

Some comments by finance experts are quite astounding
“Fayyaz Mottiar, the head of property at Absa Asset Management, finds it strange that real estate stocks were the target, questioning how they could be involved in accounting irregularities as grandiose as that of scale of Steinhoff. “With property companies, you can see the cash that goes in and out. It would be difficult to rig cash flow from rental income,” said Mottiar

I do not invest in any of them but took a 5 minute look at the summary financial report of Resilient. We have 2017 and 2016 numbers:
Rentals 2380 and 2243 – sensible
Rental Expense 870 and 795 – sensible
for property incomes of 1510 and 1448 – sensible

Now we have investment income 541 and 365 – maybe still easy to follow after you dig into the notes, which apparently nobody did on Steinhoff

but then comes Fair Value Adjustments of 793 and 2322 – at which point the mind starts boggling

followed by some weird items down to NPAT of 2994 and 3987

In these financial reporting periods the company reported Net Cash From Operations (before dividends that they set off as a cashflow from operations), from a simple rental business

1767 and 1417
that was, as seen against reported NPAT
2994 and 3987

I am sure this all complies with IFRS and all the other stuff – but it makes little sense

So when somebody asks a property expert how much money there is in property, the answer starts with “well it depends what you mean by money”

Sounds like Stanlib have a big position in the Resilient stable

Odd comment today in the Business Day indicating (in an otherwise supportive article) that Resilient, Fortress, Nepi, Rockcastle and Greenbay continuously raise equity and subscribe to each others’ shares.

As if that isn’t a red flag..?

End of comments.

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