LON:SGM | Sigma Capital Plc - Depends On Speed Of Duplication Of The Model.

23rd Jun '17 by Dearg Doom

4 comments 4185 reads

Sigma Capital (LON:SGM)

Share Price 80p Bid/Offer 78p - 82p

Market Cap £80.5 million Normal Market Size 2,500

Introduction

Sigma Captial plc was mentioned in passing as a company worthy of research. Several hours later after digesting everything I could find, I too now was interestedand I made a decision to purchase. Best to get in now ahead of the crowd, I thought!

The fact that Sigma's share price had been in a negative trend for the past few weeks was not a matter of concern. I was more than delighted to acquire shares in multiple batches over a week. Liquidity is poor for the stock and the spread can be 4p or 5p at times.

Looking back my mistake was that I was buying on old news. Re-reading a timeline of announcements and share price movement would have indicated that I was already a touch too late to the party. Once I realise my error, I sold out at a small loss as to why was I paying nearly twice the net asset value when I could by a builder with less risk and likely more reward.

12 Month Share Price Chart

Major Recent Company Developments

Sigma Capital raised £250m equity for the PRS REIT and the offer was oversubscribed. Institutions are eager to get yield through rental income and capital appreciation. The REIT is just recently quoted and the share price currently trades at 5% above its issue price.

Sigma will receive income from the newly listed REIT by three methods.

4% of the completed value. Estimate £10 million fees on £250 million development
1% for its investment advisory service over an initial 5-year contract based on the net asset value. Estimate £10 million again because the development won't be finished all at the one time.
Sigma Capital has the option to take a 1/3 equity stake in any development. £80 million investment is estimated to make 20% on return on capital. How it does this and at the same time give a 10% discount to the REIT to buy its share of the development is not clear. My back of envelope leaves a 10% net margin worth £8…

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Asagi

23rd Jun '17

Dear Dearg,

Enjoyed reading.

I own shares in this company. It may be worth noting how the shares have traded at a substantial premium to book value for the last few years i.e. "you won't get a chance to buy at 50p mate".

The reason for this excitement is something that you have indeed articulated, the rapid growth of formal landlording backed by long-term serious money. Sigma has earned its premium by doing the deals and now the IPO of the REIT.

Sigma has an established portfolio of its own and others rental properties that it earns a profit on. Under what circumstances would this company make a cash loss? Or even any accounting loss? Unlikely and temporary circumstances I will say as rents are much more stable than house prices. Hence you really shouldn't look at it as a housebuilder but maybe something more like a self-storage provider? Thus a premium is deserved.

Asagi (long SGM)

Dearg Doom

Hi Asagi,

Sigma Capital is not a building firm. It is a project manager earning an assortment of fees over the construction period. Sigma's main customer is a REIT financed by institutions. The PRS REIT is a successful format giving institutional investors a low risk, medium return on their investment by way of the rental income stream and long-term capital appreciation. Return on investment is targeted at an average of 10% p.a. One would reckon Sigma shareholders should expect a higher return on shareholder funds than that.

Sigma will probably by necessity need to sell after each site completion to help finance the next project. If however not sold then the company would have an unrealised gain on its balance sheet, and expectation of rental income matching its borrowing costs.

In the unlikely event that house prices ever decrease by a few percentage points per quarter from the start of a project to the completion, then that capital gain could be challenged. Sigma can also make a loss through other parts of its business where it is exposed to losses in a cyclical industry.

We can both agree that Sigma is in a good spot to do well. The only difference is whether Sigma can make a decent return for shareholders. It is just at which station platform (share price) to get on and whether the REIT is a more comfortable and less volatile experience

A 15% return on capital employed of £80 million would mean a net profit of £12 million per year. Sigma is nowhere close to that profit for a number of years, so why should it be priced at that level already?

Sigma’s expertise is local knowledge in which can reserve part of any action in larger more profitable projects for itself. Mind you brokers/ project managers can be changed at any time by their clients for any future business.

Regards

@MyDeargDoom

Thanks Dearg,

"One would reckon Sigma shareholders should expect a higher return on shareholder funds than that."

you mean "Dearg Doom reckons Sigma shareholders should expect a higher return on shareholder funds than that" ;-)

The £250m IPO was 'significantly oversubscribed'. The market has expressed its expectation of a satisfactory return. I have seen a report on advfn from a private investor who experienced a 44% scale back. Do we agree that the PRS REIT can expect further substantial investment inflows during the next 2/3 years?

I reckon Sigma will borrow to finance next projects when developing on their own book. Self-funded represents "opportunity for 30%+ capital returns" http://www.investegate.co.uk/sigma-capital-group/rns/half-year-report/201609300700122726L/

I expect we agree that the share price isn't right against earnings/book value today. But the line of travel is very clearly signposted now and with substantial certainty. Look at book value per share after Sigma got into PRS:

2013: 5.5p
2014: 17.4p
2015: 36.4p
2016: 40.7p

2018 EPS forecast is 7.9p. Shares 82p today.

Asagi (long SGM)

Maddox

26th Jun '17

Hi Dearg,
Nice piece of analysis. I had a look at these a while back and came to a similar view. Its an interesting business that should be in a very good position to take advantage of the build-to-rent expansion. However, difficult to evaluate the risk reward (c 65p), and chose to hold off. So, still interested and business has developed since, but need further confirmation of the value proposition in the current uncertain climate.

Regards Maddox

Sigma Capital plc - Depends on Speed of Duplication of the Model.

Sigma Capital (LON:SGM)

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Dearg Doom

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