Redefine in value proposition

If you are looking for hard currency income and willing to take a longer-term view, Redefine International is worth a second glance.

The dual-listed (LSE and JSE) offshore arm of SA heavyweight Redefine Properties, which houses UK, German and Australian property interests, is trading at a forward yield of more than 10%.

That’s double the income return currently on offer from other UK-based property companies such as Capital Shopping Centres (formerly Liberty International), albeit at additional risk.

Granted, there’s usually a reason why a stock is cheap. The company’s share price on the JSE is down 16% since mid-June 2011 and the UK share price has dropped even more.

Redefine International seems to have taken a hammering because of the company’s high gearing levels, the quality of some of its assets and weakness in UK retail sales.

The timing of the reverse acquisition of LSE-listed Wichford in August last year was also unfortunate. Wichford owns a portfolio of government-tenanted office buildings that have been affected by the UK government’s austerity and rationalisation plans.

In addition, income earned from Redefine’s UK retail portfolio, comprising mainly midsized centres in secondary areas such as Grande Arcade in Wigan, St Georges in Harrow and Birchwood in Warrington, has also been under pressure on the back of depressed consumer spending.

But interim results announced last week show that the weakness in Redefine’s UK office and retail portfolios was offset by a strong performance from its six London-based Holiday Inn hotels and a 23% stake in Australian-listed Cromwell. The latter helped the company achieve its distributable earnings target, with the dividend for the six months to February up 3,5%.

The hotel portfolio is expected to continue its strong performance for the remainder of 2012 on the back of the queen’s jubilee and the Olympics.

The hotel and Cromwell investments account for 30% of Redefine’s total portfolio value of £1,185bn.

Management is also making headway in its efforts to reduce gearing levels and negotiate new terms for a debt facility with Delta & Gamma which has to be refinanced in October.

Redefine International CEO Mike Watters says the company will undertake a £100m capital raising in September, which should reduce current gearing of a hefty 79% to a more acceptable level of 50%-60%.

Redefine Properties, which has a 70% stake in Redefine International, will underwrite £70m of the capital raising, which should allay fears that the company may not be able to raise the money.

Analysts expect the capital raising to be undertaken at a 30% discount to the current SA share price.

Management is also looking to reduce exposure to the UK office market and to sell a portfolio of German properties.

Says Watters: “A preferred bidder for the latter has already been selected. The sale will remove £98,6m of debt from our balance sheet.”

Watters says over the next few months management will focus on the expiring debt facilities, the capital raising and the disposal of certain Wichford assets.

Though debt restructuring issues have weighed heavily on investor sentiment, analysts say the stock has probably been oversold in recent months.

Stanlib property funds head Keillen Ndlovu says it seems some of the positive news has been overlooked by investors. He notes that Redefine International’s vacancies are fairly in line with its peers, and that the hotel portfolio and the exposure to Australia through Cromwell have performed well.

Says Ndlovu: “Investors who ride out the debt-restructuring process and reduction of gearing levels in the secondhalf of the year should hopefully be rewarded by a rerating in the share price.”