Small Cap Value Report (28 Nov) - NRR, PGB, CRE, NGR, DGB, LTHM, PTO

Thursday, Nov 28 2013 by

Good morning. Firstly I've had a quick look at the interim results to 30 Sep 2013 from Newriver Retail (LON:NRR), which as regulars will know is a property company that I rate highly - with excellent, experienced management, and a good strategy to buy cheap shopping centres which they can improve through better management. It's a REIT therefore obliged to pay out 90% of its earnings as dividends. That has meant an attractive dividend yield for investors (forecast at 6.2% this year), however the downside of this approach is that the company has had to issue new equity to finance its expansion. So there is continuous dilution going on.

So despite profit growth of 60%, EPS has only marginally increased to 6.5p for the half year. The dilution has also had a negative impact on NAV. Despite increasing net assets substantially from acquisitions, the 115% increase in ordinary shares in issue means that NAV per share has actually fallen, to 222p. This compares with a share price of just under 260p, so that's a valuation of 17.1% premium to NAV, which strikes me as getting a bit warm. I would suggest that these shares probably need to take a breather, to allow time for NAV to catch up with the share price. As a long-term growth, and decent dividend paying share however, it remains attractive in my opinion. I would certainly buy back if the share price fell back to around NAV again.

The upside should come from the company gearing up a bit more, and deploying the rest of the cash raised in July 2013. More property acquisitions are announced today, including £34.3m being spent on acquiring two centres, in Llanelli and Oxford, at an initial rental yield of 7.8%. Also, an interesting deal to acquire 202 Pubs from Marstons for £90m (so an average of £445k each), and gradually convert them into convenience food stores or restaurants. This looks a clever deal, as Marstons are guaranteeing the rent for up to four years, at an initial yield of a whopping 12.8%. This deal is being funded through a JV with an investment partner.

It's a reminder of the fundamental problem that Government policy is having on Pubs in Britain - i.e. that it is so expensive to buy drinks…

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NewRiver REIT plc is a real estate investment trust engaged in the real estate business in the United Kingdom. The Company is a retail and leisure property investor, asset manager and developer. The Company owns or manages a portfolio of approximately 30 shopping centers, over 20 retail warehouses, a portfolio of approximately 360 public houses with retail and mixed-use development opportunities and a range of high street retail assets. The portfolio totals approximately eight million square feet with over 2,000 occupiers. The Company is focused on convenience-led retail assets that cater for everyday household spending needs. The Company operates shopping centers, such as Broadway Shopping Centre, Sovereign, Promenades, The Martlets and Priory Meadow. It operates high street assets, such as 39 Broad Walk, 5 Trinity Square and Golden Square. It operates retail warehouses, such as Waterfront Retail Park, Mount Street Retail Park and Cuckoo Bridge Retail Park. more »

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  Is LON:NRR fundamentally strong or weak? Find out More »

15 Comments on this Article show/hide all

jraitt 28th Nov '13 1 of 15

Hi Paul,
Did you find anything interesting from last night's Companies?

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Paul Scott 28th Nov '13 2 of 15

In reply to post #79473

Hi John,

I wasn't able to get into London last night after all, unfortunately.
So would be helpful if anyone who did attend the ED Investor Forum could comment on some or all of the 3 companies presenting.

Cheers, Paul.

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jjis 28th Nov '13 3 of 15

Any thoughts on Creston?

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bsharman 28th Nov '13 4 of 15

Maybe the IPA Bellweather survey is a survey of people drinking Indian Pale Ale?!

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grumpy5 28th Nov '13 5 of 15

bsharman - if so they are clearly not drinking the Marston's version!

re Eq Devs last night. All 3 presentations were good:
Fairpoint - few financials given, don't like the industry, don't see a catalyst for SP to move up
MLIN - I own it - could bounce next month on FDA news in the US
Kromek - vg presentation by the founder. Exciting company. Would not excite Paul as it is an early stage loss-maker! But transformational technology, and plenty happening in its underlying markets. Could be a multi bagger, or could go to sleep for 2 years.

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clissold345 28th Nov '13 6 of 15

James Latham's Half Yearly Report is out today. As far as I remember they are usually cautious in their outlook but this time they are positive:

"The management accounts and information show growing revenue for October and the first half of November, at slightly improved margins. Bad debts have been below our expectations but will remain a concern over the next few months. We have a wide range of customers who are generally busier and more confident about future prospects than this time last year. The company is in a strong position to meet increasing demand."

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StrollingMolby 28th Nov '13 7 of 15

Re the Newriver Retail (LON:NRR) JV:

This deal is being funded through a JV with an investment partner.

Not just any investment partner though, but PIMCO.


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jraitt 28th Nov '13 8 of 15

Sorry didn't get to Equity either.
Is the pub decline only down to price? Every town has a problem on fridays/saturdays with alcohol related behaviour due to night clubs where the cost of the drinks is much higher than pubs. I think the day of the pub being the social meeting place for the neighbourhood has gone. People come home from work and have a can in front of the tele with the family rather than wave goodbye and say "See you at 11 o'clock dear" - try it.
I'm too old to visit clubs but assume any beer is bottled and thus no good to VIA.

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nicktudor 28th Nov '13 9 of 15

Hi Paul, really enjoy the daily reports so please keep them going.
Read your comment on Creston, would urge anyone considering an investment to review the long term track record of the current management. Its not a particularly pretty picture and despite the good yield they have a consistent record of over promise and under delivery imo. Could be a good entry point given the likely pick up in marketing services over the next 12-18months however there are other better candidates out there in my view - CMS, SIV, etc if you're looking for a candidate in this arena.

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danielbird193 28th Nov '13 10 of 15


Agreed that $CMS and $SIV are both investable propositions in the marketing sector. However they are both on forward multiples of above 10x, compared to $CRE on around 8x. They both yield less, and also have debt on the balance sheet. The most interesting thing about the $CRE interims for me was the fact that they are now debt free, despite making what looks like a significant investment in new premises leases. The company sounds bullish about prospects for the future, so I for one will hold on for some good news in H2.

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Graham Fraser 28th Nov '13 11 of 15

Another intersting point to look at in the NRR purchase is the huge discount to book value Marstons is selling it's pubs at. Book value of pubs sold is £137m sale price £90m plus up to 5 years guaranteed rent(not 4) of 13%,suggests book value of these pub cos (and may be other property cos) could be seriously overvalued(egThw?).

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Paul Scott 28th Nov '13 12 of 15

In reply to post #79487

Hi Graham,

Very interesting comments. I think one should definitely assume that Pub groups have overvalued freeholds on their Bal Sheets - the highly geared ones, e.g. Punch, must be desperate to try to keep asset values in the books as high as possible, to keep the Banks onside.

The beauty of Daniel Thwaites (OFEX:THW) is that the shares are valued at such a massive discount to NTAV that this is already factored in, in spades.

Regards, Paul.

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intuitive6191 28th Nov '13 13 of 15

Which brings me round to thinking about how all this will affect Vianet (LON:VNET) ? They seemed to think that Pub closures had largely finished

If this statement is correct it confirms my long held opinion that the management of Vianet are in denial.

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cig 28th Nov '13 14 of 15

In reply to post #79483

At some point people may get bored of sitting in front of the telly with their lonely can. I think pubs' demise is overrated. It's also very cyclical: it's a discretionary expense that's one of the first things you cut when money is tight, and conversely. So after a wave of closures the industry is doubly operationally leveraged on a recovery (well, the kind of recovery that trickles down to wages).

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Dendyver 17th Dec '13 15 of 15

Your 28 November report Nature (NGR)
I have taken a look today after their further fall today.
Two important negatives that stand out.
Debtors of 6002 is more than 25% annual revenue of 14296
Cash generated from Op. Activities before tax 1986 is less than 50% of operating profit 4589
Bearing in mind their roce & margins are thin, am I missing something?

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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