Posted on 04 Jul 2014

Buy Palace Capital at a Deep Discount


If it's value and recovery potential you're after, look no further than regional commercial property group Palace Capital (PCA). The shares trade at a deep discount to book value, boast an attractive 4 per cent forecast dividend yield almost twice covered by earnings, and offer potential upside from both a recovering regional property market and active management of the group's expanding portfolio.

"We think we've got in early," says Neil Sinclair, Palace's 70-year-old chief executive officer with nearly 50 years' experience in the property sector. He is referring to the company's transformational £39m acquisition in October of a portfolio of mixed-use commercial property from Quintain Estates (QED), which sold the non-core assets to focus on the London market. "We took the view that London [prices] had grown quite a lot since 2009, but that the regions really hadn't grown at all," Mr Sinclair told us. "This is only the beginning of the regional upturn, which started last year."

 

 

Palace was able to snap up the properties for a bargain-basement price - their yield at the time was over 13 per cent - as the properties were also underperforming. The key task now, according to Mr Sinclair, is revamping the portfolio through hands-on management to improve and safeguard the cash generation.

So far, Palace has done just that. In the six months to 31 March, the company sold four vacant properties and one part-vacant property at prices above book value. It also agreed a number of new lets on other properties; this has not only increased rental income, but simultaneously reduced expenses such as business rates and insurance fees as they can now be passed on to the tenants. All in all, Palace's active portfolio management - alongside a broadly rising UK property market - helped increase the company's book value per share by a whopping 54 per cent to 356p a share as of 31 March. The property values were estimated by one of the top five external independent companies in the country.

 

 

 

At the current share price of 300p a share, investors can buy Palace's shares today on just 13 times forecast earnings for the next 12 months and at a 16 per cent discount to net asset value (NAV) - if they can get their hands on enough to build a proper stake. The shares are still pretty thinly traded, despite the free float being just over 90 per cent. We expect the discount to book value to gradually unwind, though, and for Palace's NAV to further increase, as the company delivers on its current strategy, makes further cheap acquisitions, and benefits from a rising regional property market.

Encouragingly, since the period-end Palace has completed three more important lettings of properties where leases were expiring. It has also "entered into detailed discussions with the vendors" of another potential property portfolio, according to analyst Chris Thomas of Arden Partners.