Thursday, March 1, 2018

Why I Bought Adrenna Properties

Once in a while a company a catches my eye because of its performance relative to price. But the company ownership structure makes it not feasible to buy. I remember one German company I saw once with very attractive returns relative to stock price, but it is 99% owned by a single entity. So I didn't want to buy because the price does not reflect the fundamentals but whatever a few small retailers value.

Recently I found Adrenna Property Group (ANA:JSE). Adrenna is a South African Property investment company. Its properties are business and residential held for rent buildings in the Cape Town area. Cape Town is the capital of South Africa and is a relatively affluent city in South Africa.

The whole Adrenna story started in 1999 when the Quyn Group first listed on the Johannesburg Stock Exchange in 1999. At first it was a recruitment and outsourcing company. Then Quyn acquired the Colliers group of companies in South Africa and changed its name to Colliers South Africa Holdings Limited. Initially the combined company struggled and decided to delist in 2004. Later, after some major restructuring and some decent results, the company changed its name to Adrenna Property Group Limited in February 2012, and it relisted on the JSE.

From that time onwards, the Adrenna has steadily improved its results. And that caught my eye. The following shows the results in the years following the relisting. All monies are in units of millions. Note that the company has consistently reduced debt while increasing equity through fair value appreciation. The capitalization rate is the net operating income before interest and revaluation divided by the property value.

TTM 2017 2016 2015 2014 2013
Price R 1.00 R 1.55 R 0.65 R 1.45 R 0.80 R 0.40
Shares 55.9 55.9 55.9 55.9 55.9 55.9
Equity 151.1 146.5 125.4 117.6 110.1 98.2
Earnings TTM 19.5 21.1 7.9 7.8 12.2 10.5
Marketcap R 55.90 ($ 4.58) R 86.64 ($ 7.10) R 36.34 ($ 2.98) R 81.05 ($ 6.64) R 44.72 ($ 3.67) R 22.36 ($ 1.83)
ROE 12.9 14.4 6.3 6.6 11.1 10.7
PE 2.9 4.1 4.6 10.4 3.7 2.1
PTBV 0.39 0.62 0.3 0.73 0.43 0.24
Div Yield 0 0 0 0 0 0
BVPS 2.7 2.62 2.24 2.1 1.97 1.76
Debt 0.4 0.37 0.52 0.53 0.63 0.84
Cap Rate (%) 8.2 7 6.7 4.8 6 6.4

The company actually has high earnings through fair value reappraisal. So beware when looking at the incredible PE numbers!

The company's cash flow mostly pays for expenses and interest on debt.  South Africa is a country with high inflation and therefore interest rates are also high. The company's operating income is 2.5 times interest expense. This ratio is a bit lower than I'd like but it is still acceptable.

So Adrenna looks very cheap, but is there a catch? And indeed, there is a problem when investing in Adrenna. That problem is the company's market cap. The company's five largest shareholders own 72% of the company. They include two board member and affiliated entities. This is encouraging in that the board has aligned interests with the average shareholder but it also means there is very little float, possibly much less than USD $1 million. Still I have built as large a position as possible without excessively moving the stock price. Hence, I regard my position in Adrenna as only a trial run of my investment approach because this is not a stock I can buy in size.