Sigma Capital Group


Dec 19, 2013 - ...

6 downloads 177 Views 89KB Size

Joint venture with Gatehouse Bank

Sigma Capital Group New funding structure to finance project growth

Real estate

Sigma has secured its first JV based on its new institutional funding model. This has been designed to facilitate a material increase in the scale of residential development carried out by its JVs with public sector partners. The JV with Kuwait’s Gatehouse Bank expects, subject to securing development debt, to deliver c 2,000 units in an initial two-year period and potentially another c 4,600 rental homes if subsequent phases are committed. Gatehouse has agreed to inject the equity component and both partners are in negotiation with lenders to secure construction debt. Although Sigma will not report full details of the fee structure until the debt is in place, we anticipate that it will earn revenues from delivery of discrete components of an agreed development programme over a three- to fiveyear project term. It will include sourcing land and debt plus management of the development, letting and investment portfolio. Year end

Revenue** (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

12/11

2.5

(0.9)

(2.1)

0.0

N/A

N/A

12/12

2.3

(0.3)

(0.7)

0.0

N/A

N/A

12/13e

5.6

(0.4)

(1.0)

0.0

N/A

N/A

12/14e

2.5

0.2

0.4

0.0

100.0

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. **12/13e includes £3.4m pre-sales from North Arran Way.

JV to deliver initial £200m portfolio of 2,000 homes The new joint venture could potentially create one of the UK’s largest new-build residential housing portfolios. Sigma’s key contribution, in addition to its project management experience, is derived from its ready access to substantial residential development land with planning consent from its three existing local authority partnerships. The funding structure is designed as a template, which can enable the group to meet existing and potential future partners’ identified needs for significant new social and affordable housing.

Interim results We have reviewed progress made by the group’s existing property services and residual VC operations in the first half. The major changes to forecasts reflect delayed timing of existing developments. We have not yet included any contribution from the new JV, but will update forecasts to reflect potential fees once Sigma confirms it has secured debt finance.

19 December 2013

Price

40.00p

Market cap

£18m

Net debt (£m) at 30 June 13

0.3

Shares in issue

45.9m

Free float

65%

Code

SGM

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

73.9

85.0

553.1

Rel (local)

78.9

85.9

483.7

52-week high/low

40.0p

6.1p

Business description Sigma provides urban regeneration, property development, financing and asset management services to a contracted private and public-sector client base, the latter in Liverpool, Salford and Solihull. A VC fund management arm is in winddown.

Next event FY13 results

April 2014

Analysts Roger Leboff

+44 (0)20 3077 5700

Martyn King

+44 (0)20 3077 5745

Valuation: Underpinned by JV prospects

[email protected]

We will update our forecasts for the new JV when the debt is secured. However, the shares are up c 63% since the deal was announced, reflecting potential property division revenues based on an estimated £2bn urban regeneration pipeline in existing JVs and £1bn at Winchburgh. At agreed fee rates for project management and finance, £4-5m pa of revenues are possible over a five- to seven-year period. The new institutional funding model is designed to unlock this and create a template to finance future residential projects.

Edison profile page

Sigma Capital Group is a research client of Edison Investment Research Limited

Boost from new JV Sigma has announced a JV with Gatehouse Bank, a London-based, Shariah-compliant investment bank with real estate interests in the UK and US. Gatehouse has committed to provide the equity required to underwrite the £200m development cost, including debt, of an initial tranche of c 2,000 rentable homes in Greater Manchester and Liverpool. The two partners currently seek secured construction debt facilities with prospective lenders for this initial tranche, construction of which Sigma expects will take 24 months, with homes delivered on a phased basis. The first tranche alone would represent one of the UK’s largest new-build residential housing portfolios. The terms of the JV provide potential for delivery of up to c 6,600 units and Gatehouse has retained an option to provide the equity element required for the second tranche of c 4,600 new homes. That phase has an anticipated gross development cost of c £500m. Sigma’s contribution to the JV includes sourcing residential development sites, underpinned by its three existing local authority partnerships, which provide ready access to residential land with existing planning consent. The initial tranche of c 2,000 new rental homes is likely to be accommodated from the group’s partnerships with Liverpool and Salford City Councils on 22 sites totalling more than 90 acres across Greater Manchester and Liverpool.

Revenue model: Potential for contribution from FY14 We have not sought to project returns from the new JV at this stage, but await the details of the JV fee structure due to be disclosed on receipt of construction debt. The new funding arrangements are an extension of the group’s existing property services business model, which generates fees from three areas: urban regeneration development projects; completed portfolios; and access to property finance. These provide the group with revenue visibility for typically a one- to two-year life related to a discrete project. Once funding is secured, the initial transaction with Gatehouse will have an initial two-year life, but can potentially be extended beyond that. We anticipate that the fees will to some extent match Sigma’s existing arrangements with its local authority JV partners, in which case it could potentially generate revenues from: 

land procurement;



delivery of new residential units;



management of the lettings process; and



participation in growth in capital values of assets developed.

Actual returns will also pivot on development costs and profit. Notional development profit will be a function of the pre-agreed valuation of development land sourced from Sigma’s local authority partnerships; construction cost and interest on the development facility; and the way in which the letting and purchase of completed properties has been underwritten at inception. Sigma expects construction of the first phase of rental homes to commence shortly after debt is secured and to be completed and let within 24 months. An average c £100,000 cost per unit including land makes these relatively affordable homes, which we expect to be built in substantial phases by an experienced large-scale UK house builder.

Institutional funding model: Template for future schemes The institutional funding model has been designed as a template suitable for similar arrangements with existing and new partners, as a way to allow the group to deliver large portfolios of new affordable and rentable homes in areas with significant housing shortages. Sigma reports that it is already in discussion with other local authority partners that may be interested.

Sigma Capital Group | 19 December 2013

2

Interim results: Progress on regeneration schemes In September, the group reported interims to end June 2013. There was a slight decrease in group operating losses to £0.3m (H112: £0.6m loss). Revenues doubled to £2.2m (H112: £1.1m). £1.2m (H112: nil) was contributed by the group’s North Arran Way office and retail development within its North Solihull JV, which Sigma is managing. Excluding that scheme, property related revenues were up 12% y-o-y at £0.65m. The turnover of the group’s venture capital fund management activities, which are progressively being wound down, fell to £0.3m (H112: £0.5m). Exhibit 1: Results summary Revenue Cost of sales Gross profit Other operating income Profit on disposal of VC equity investments Unrealised profit on investment revaluations Administrative expenses Operating result Net finance income Share of loss of associate Exceptional Pre-tax profit Adjusted pre-tax profit Tax Profit after tax Basic EPS Normalised EPS

H112 1,090 0 1,090

H212 1,236 0 1,236

H113 2,156 (1,187) 969

H213e 3,447 (2,167) 1,280

(7) (277) (1,377) (571) 19 (95) 0 (647) (354) 0 (647) (1.42p) (0.78p)

0 (549) (1,198) (511) 3 (16) 0 (524) 55 0 (524) (1.15p) 0.12p

20 49 (1,378) (340) 3 (76) 0 (413) (466) 0 (413) (0.91p) (1.02p)

0 0 (1,276) 4 3 0 85 92 24 0 92 0.20p 0.05p

Source: Sigma interim results, Edison Investment Research estimates

The combined group reported a £0.34m operational loss for the first half. Taken separately, trading losses in the property division fell 61% to £0.1m and the VC division loss was £0.1m, versus a profit of £0.1m in H112, with the balance accounted for by holding company costs. The pre-tax loss improved by 36% to £0.4m, including Sigma’s share of losses made by its associate company, Frontier IP Group. Since the half-year end, Sigma has reduced its share in Frontier IP from 26.86% to 3.19% and will in future account for its remaining holding as an investment at bid price. We see potential for significant growth in recurring revenues from the successful roll-out of the institution funding model, the first example of which is the JV with Gatehouse Bank referred to above. Although details of fees have yet to be disclosed, Sigma should benefit from the deployment of funds to finance substantial, primarily residential development, and potentially over the longer term from a share of any increase in the value of the assets held by the individual funds.

Property: Urban regeneration and asset management Sigma’s urban regeneration revenues are derived from work carried out within three partnerships with local authorities, Liverpool, Salford and North Solihull. These projects provide Sigma with visibility on a large proportion of the fees due at each scheme’s inception, although part is contingent on ultimate development profit and capital deployed. It also generates asset management fees from managing two developments, at Winchburgh in Edinburgh and City Wharf in Aberdeen. These generate fixed fees, with a small proportion based on meeting performance targets. We review below the progress made by these activities during the first half and their impact on our full year forecasts.

Sigma Capital Group | 19 December 2013

3

Regeneration Liverpool The Regeneration Liverpool partnership reported higher activity in H113 on a broader range of projects. It has so far finished 131 homes at the Norris Green development, a £100m housing scheme and begun construction of the third phase of 63 new homes in March 2013 and the fourth phase of 167 units in June 2013. Sigma is due to receive c £0.22m for phase three; c £0.12m paid over 18 months and the balance on completion. For phase four, it will receive c £0.6m, c 3.4% of the gross development cost; around half over the next three years and the balance on completion of sale of the homes, construction of which is due to finish in December 2017. In March the JV signed a land option agreement to develop a 7.4 acre commercial site near Lime Street Station in the city centre, scheduled for 2014-20. In August, it signed an option agreement to develop a 12 acre site (formerly Queen Mary School) into 164 new homes for both open market sale and for rent. The total gross development value of this scheme is c £27m; it will generate around £0.8m in fees for Sigma over the next five years. Construction is due to commence in 2014.

North Solihull Partnership The North Solihull Partnership secured the forward sale of its 30,000sqft commercial and retail development, North Arran Way, at the start of this year and began construction in March. Sigma has begun to draw a £4.045m facility from the government’s Growing Places Fund to finance the development, due to complete in January 2014. North Arran Way is expected to generate c £0.3m fees and profit for the group as the developer of this project. The interim results included a portion of the total anticipated sales and development costs, based on the percentage completion at the mid-year. The loan will be repaid 10 days after practical completion from an agreed forward sale of the development. Sigma also commenced construction of the infrastructure works and enterprise centre at Craig Croft in North Solihull in May; completion is due by April 2014.

Salford – Higher Broughton Partnership The partnership had sold 25 of the 80 housing units at the Top Streets development by end August 2013. It has received detailed planning consent for a new healthcare and retail scheme valued at c £9m at another site, Newbury Place, and expects contractors on site before the end of the year.

Asset management – Winchburgh, Edinburgh The residential development at Winchburgh, situated eight miles west of Edinburgh, is the main focus of the group’s asset management operations. It is managing the project implementation phase and its five-year management contract is expected to generate £1.8m in fees over the contract term, with potential additional performance-based remuneration. Since it was granted planning permission in principle by West Lothian council in April 2012 it has concluded sale agreements with four national house builders for residential development plots totalling 367 houses, and discussions are underway with a fifth house builder for a further 111 units. Detailed planning permission has been issued for 478 plots.

VC fund management: Exit sought for legacy holdings Sigma is still working on a full exit from its remaining VC fund management activities, which comprise fund management and limited partner interests. In H113 an investment company, i-design group, was taken over in a sale that generated £0.2m of total cash for Sigma. Following the disposal, it held 15 company investments in four venture funds, and the carrying value of its limited partner interests in those funds at the mid-year was £0.6m (2012: £1.2m).

Sigma Capital Group | 19 December 2013

4

Disposal of holding in associate company Frontier IP Post the mid-year Sigma sold 2.905m shares in associate company Frontier IP Group at 10p/share, which reduced its interest from 26.86% to 3.19%. This generated net proceeds of £0.3m and an expected £0.1m profit. As Frontier is no longer an associate company, Sigma will account for its remaining 0.6m shareholding as an investment at bid price.

Financials We have trimmed our forecasts for this year as a result of slightly delayed property project starts. We do not regard this as material to group prospects, which pivot almost entirely on completion of the financing for the Gatehouse JV. That would potentially unlock a significant increase in the scale of the residential development portfolio and associated fees, and possibly establish a precedent for further similar arrangements. Sigma had £0.3m of net debt at the end of June 2013 (H112 net cash of £0.7m). This debt has been provided by the UK government’s Growing Places Fund and relates to North Arran Way, the only instance where Sigma is acting as the developer. We forecast net debt at c £3m at the current year end, which will be repaid entirely on completion of the development scheduled for January 2014. The North Arran Way development is expected to generate c £0.3m of fees and profit. Group cash balances will also benefit in H213 from the Frontier IP sales proceeds. The first half included significant investment of management time to develop its institutional funding model, the benefit of which will not be reflected in the financial performance until FY14 at the earliest. Excluding contributions from the new JV, our projections are that recent growth in the project pipeline puts the property division on track to contribute a full year trading profit in FY14. We have not built VC exits into our projections. Realisations at 50% of book value would generate c £0.35m, but exit timings would affect retainer fees.

Valuation The shares responded very positively to news that the first JV had been secured and pushed up the market cap to £18m. However, it is not yet possible to accurately quantify potential returns from the new JV, as there has been no detail on fees. However, subject to securing construction debt, it appears to represent a step change in revenues, as Sigma has access to a pipeline of urban regeneration projects with an estimated £2bn valuation in its existing local authority JVs, plus c £1bn within Winchburgh. If it can finance and progress these, it should be able to generate a steady fee income stream over at least the next decade. We have previously assessed these in terms of a potential c £4-5m pa of fee income, and if Sigma secures funding for c 10% of that, possibly another £0.3-0.4m pa of commission revenue. The new JV underlines the growing importance of Sigma’s property advisory operations, with the VC funds business and associated investments in wind-down. We still expect property to become the group’s sole operation during FY14. However, we have not incorporated any contribution from the JV in our current forecasts, as we await clarity on the fee structure when debt facilities, currently under negotiation, are secured. These are expected to be concluded during the first quarter of 2014. That would suggest that the first major contribution to revenues and profit from the Gatehouse JV will be in H214 at the earliest, as construction of the first phase of c 2,000 units will not commence until the debt is in place.

Sigma Capital Group | 19 December 2013

5

Change in significant shareholding: WCC sells down to 2.26% On 2 December, Sigma reported that Sir Tom Hunter’s investment vehicle, West Coast Capital Investments, had recently reduced its holding in the group from c 10m shares (21.9% of the issued capital) to 1.04m shares (2.26%). Henderson Global Investors has increased its stake from under 5% to just under 14%. Exhibit 2: Financial summary £'000s

2010 IFRS

2011 IFRS

2012 IFRS

2013e IFRS

2014e IFRS

1,836 (55) 1,781 (507) (535) (1,366) (28) 0 (1,929) 31 (417) (1,250) (1,754) (3,565) (10) (1,764) (3,575)

2,468 0 2,468 (704) (723) (123) (139) 0 (985) 15 3 (1,020) (936) (1,415) 0 (936) (1,415)

2,326 0 2,326 (187) (210) (24) (22) 0 (256) 22 (826) 0 (299) (1,171) 0 (299) (1,171)

5,603 (3,354) 2,249 (354) (372) (18) 5 0 (385) 6 49 85 (442) (321) 0 (442) (321)

2,517 0 2,517 181 175 (18) (15) 0 142 8 0 0 183 150 0 183 150

Average Number of Shares Outstanding (m) EPS - normalised (p) EPS - normalised and fully diluted (p) EPS - (IFRS) (p) Dividend per share (p)

46.6 (3.7) (3.7) (7.6) 0.0

44.2 (2.1) (2.1) (3.2) 0.0

45.6 (0.7) (0.7) (2.6) 0.0

45.6 (1.0) (1.0) (0.7) 0.0

45.7 0.4 0.4 0.3 0.0

Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%)

97.0 -27.6 -29.1

100.0 -28.5 -29.3

100.0 -8.0 -9.0

40.1 -6.3 -6.6

100.0 7.2 7.0

BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Other - investments, financial assets etc Current Assets Trading investments Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets

4,281 2,209 15 2,057 2,408 53 389 1,821 145 (1,007) (1,007) 0 0 0 0 5,682

2,251 322 41 1,888 2,304 172 606 1,265 261 (802) (802) 0 0 0 0 3,753

1,645 614 26 1,005 1,833 45 688 1,024 76 (881) (881) 0 0 0 0 2,597

1,268 596 16 656 6,989 2 1,463 948 4,577 (5,950) (1,950) (4,000) 0 0 0 2,307

1,244 578 10 656 1,678 2 387 1,137 152 (450) (450) 0 0 0 0 2,472

CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)

(1,622) 33 0 0 50 (158) (94) (1,791) (3,612) 0 0 (1,821)

(379) 15 0 0 (142) (50) 0 (556) (1,821) 0 0 (1,265)

(292) 22 0 0 29 0 0 (241) (1,265) 0 0 (1,024)

(4,560) 6 0 (8) 469 16 0 (4,076) (1,024) 0 0 3,052

4,181 8 0 0 0 0 0 4,189 3,052 0 0 (1,137)

December PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Goodwill & Intangible Amortisation Provisions & other Exceptionals Operating Profit Net Interest Unrealised profit/(loss) on revaluation of investments Provisions/other losses Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3)

Source: Sigma Capital Group accounts, Edison Investment Research

Sigma Capital Group | 19 December 2013

6

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 Services Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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 not 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 2013 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Sigma Capital Group 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 not 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. 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 2013. “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 Sigma Capital Group 60325 Frankfurt Germany

London +44 (0)20 3077 5700 High Holborn 2013 | 19 280 December 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 1162 Level 33, Australia Square 264 George St, Sydney NSW 2000, Australia

Wellington +64 (0)48 948 555 Level 15, 171 Featherston St Wellington 6011 New Zealand

7