Quintain continues its post-meltdown rebound.
A little over a year ago, on 3 June 2010, I wrote about property developer Quintain Estates & Development (LSE: QED), which was then trading at a massive discount to its net asset value.
Back from the brink
Quintain specialises in social housing and regeneration of 'brownfield' sites in London, plus it has a fund-management division.
In common with many other property firms, Quintain got into difficulty in 2007/09, as commercial-property values slumped by 40% to 50%. As property prices plummeted, the developer's gearing soared to 105% in March 2009, perilously close to the 110% ceiling allowed by its banking covenants.
Hence, Quintain went cap in hand to its owners, raising £183.5 million from shareholders in a rescue rights issue in December 2009. This reduced Quintain's gearing to a mere 46% by March 2010, giving the developer plenty of breathing space.
Of course, this toxic combination of collapsing property prices and banking worries crushed Quintain's share price. Having peaked at 964p in late July 2007, Quintain's shares were trashed during the credit crunch, falling to an unbelievable 7.5p at the end of March 2009.
When I covered Quintain last June, its share price had bounced back to 47p, still a deep discount of 65% to the firm's net asset value (NAV) of 133p.
The rebound continues
A year ago, I was unsure whether Quintain was a screaming buy or a 'value trap' at 47p. Judging by subsequent events, it looks like it was the former.
As I write, Quintain's share price stands at 65p, up 38% since my previous review. This values the firm at close to £340 million, a level at which it could soon return to grace the FTSE 250 index once more.
What's more, Quintain's recent results suggest that the company is continuing to gain traction. In the 12 months to 31 March 2011, gross profit rose 1% to £26 million, with adjusted pre-tax profit leaping 38% to £3.6 million.
However, after write-downs in the first half of its financial year, Quintain's pre-tax loss more than quadrupled to £48 million, versus £10 million in 2009/10. Then again, the commercial-property market has improved since last summer, so future write-downs should be more subdued.
Also, the firm's fund-management arm grew funds under management by 26% to £1.3 billion, on target to reach its goal of £2 billion of assets by 2013.
Business as usual
For a property company, Quintain remains moderately leveraged, with gearing of 60% in March 2011, versus covenants of 110%.
What's more, the owner of Wembley City and Greenwich Peninsula continues to invest in what it sees are attractive developments, as well as striking deals and selling assets at prices above book values.
Just last Friday, Quintain unveiled a deal with Swiss-based Keystone Group to develop a 660-bed student accommodation on a plot adjacent to Wembley Stadium. Keystone will pay £14.5 million for a 251-year lease over the land, plus £38.5 million following completion of the building in the summer of 2012.
At the same time, Quintain announced the sale of five three-bedroom homes at Wembley City to Real Partners for £1.5 million, plus index-linked ground rents.
A straightforward asset play
The investor's usual tools for valuing businesses, particularly the price-earnings ratio, don't work well when it comes to picking over property firms. In most cases, property businesses are best looked at as simple asset plays, weighing up the company's net asset value against its share price. Quintain's adjusted, diluted NAV is 125p a share, 60p above its current share price.
Thus, buying into Quintain gets you 125p of London commercial property (6% below the 133p recorded in March 2010) for just 65p, a hefty discount of 48%.
As I see it, Quintain is a binary bet. If you believe that the outlook for commercial property in London -- especially urban-development sites -- looks bright, then you can buy into this market via Quintain at almost half price.
Note that Quintain is well-placed to benefit from any Olympic revival as London hosts the 2012 games. William Rucker, Quintain's chairman seems optimistic, stating, "Building on the measures taken last year and the actions we have planned, I am confident of further momentum in the months to come."
On the other hand, if you worry a second property slump could be on the horizon, leading to a sustained fall in property values, then it's best to turn down Quintain's shares for now.
If you'd like to find more opportunities like this one, then check out our latest special free report. It reveals the names of two more property firms that we believe are trading at a big discount to their asset value.
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