Posted on 08 Jun 2017

Palace Capital's cautious approach pays off


Our previous tip

  • WE SAID Buy
  • WHEN 27 August 2015
  • PRICE 370p
  • TIP PERFORMANCE TO DATE+1%

Palace Capital (PCA) focuses on acquiring and refurbishing smaller property lots outside of London, where possible in off-market deals. It's very choosy, making just one acquisition in the year to March 2017. But this is paying off in terms of quality because the valuation uplift on the portfolio wasn't much changed at £3.1m (£3.6m in FY2016), while selling non-performing assets brought in another £3.2m in profits.

Typical of the disposals, a site in Maldon bought in 2013 for £2m met with opposition from the local authority for a change of use, and as a result the property was sold for £3.9m. The one acquisition was Boulton House in the heart of Manchester for £10.6m. Following refurbishment, the current £12 per sq ft rental income is expected to rise to nearer £16.

The Hudson House office block in York, which originally had planning consent for conversion into residential units, is now to be demolished, subject to planning consent (expected around September), and 127 apartments and 34,000 sq ft of much-needed office space will be built. Within the 44 properties owned (excluding Hudson House), overall occupancy rose from 89 per cent to 91 per cent.

Analysts at Arden Partners are forecasting adjusted pre-tax profits for the year ending March 2018 of £6m, giving EPS of 20.3p, from £6.7m in the previous year.

PALACE CAPITAL (PCA)

ORD PRICE:

372.5p

MARKET VALUE:

£94m

TOUCH:

365-380p

12-MONTH HIGH:

393p

LOW: 308p

DIVIDEND YIELD:

5.0%

TRADING PROPERTIES:

nil

DISCOUNT TO NAV:

15%

 

 

INVESTMENT PROP:

£184m

NET DEBT:

63%

 

Year to 31 Mar

Net asset value (p)

Pre-tax profit (£m)

Earnings per share (p)

Dividend per share (p)

2014*

357

21.2

432

4.5

2015

396

13.9

82.4

13

2016

414

11.8

43.9

16

2017

436

12.6

36.6

18.5

% change

+5

+7

-17

+16

Ex-div: 7 Jul

Payment: 28 Jul

*14-month period

IC VIEW:

Palace Capital works on very strict criteria for acquiring new assets, so don't expect any fireworks. But with a quality portfolio, an attractive dividend and shares trading at a discount to NAV, we're sticking with our earlier advice (370p, 27 Aug 2015). Buy.