Page 2 - Intersuisse - Friday, 16 May 2008 - (See Page 6 for Disclaimer and Disclosures)
Woolworths acquires 19.9% strategic holding from Hedley Leisure & Gaming
Recommendation: Buy for soundly underpinned double-digit tax-deferred yield
Investment Rationale LEP pays high tax deferred distributions by virtue of its highly geared structure which also affords growth prospects through the underlying value of its pub portfolio with annual CPI rent adjustments. The price halved in recent months as Listed Property Trusts came under pressure. Despite some recovery, LEP remains on a very strong yield and below NTA. Last December LEP hedged a significant proportion of its debt to mitigate interest costs, ensuring its strong yield prospects. This move and the potential for expansion prospects add to LEP’s attractions around current prices. Events since our April 2008 review We reviewed ALE as a Buy on 3 April at $2.71. Since before then, funding pressures on Hedley Leisure & Gaming Property Trust (HLG) have been remarked on in the press, with the possibility mooted that Woolworths (WOW) might be interested in HLG’s 23% stake in LEP. On 12 May WOW announced it had entered into an unconditional contract to acquire a 19.9% interest in LEP from HLG at a price of $3.34 cash per security, for a total cost of $57m. In addition, HLG will receive the benefit of the value of the next distribution paid by LEP on those securities. This has been flagged at 16.75 cents per security. WOW advises that LEP is a strategic investment and it has no current intention of increasing its stake. WOW notes that the last disclosed NTA of LEP was $3.40 per security. We note that that was an independent valuation at June 2007, confirmed in December 2007, based on a sum of the properties. A premium should be appropriate on a whole portfolio basis. The deal by WOW removes a potential overhang of the securities of LEP and sets a value on its securities – of $3.40 ex or $3.56 cum next dividend. Clearly WOW was an interested buyer, holding 75% of ALH, the long-term lessor of LEP’s $800m pub portfolio. It was also a cashed-up buyer, but not one that would typically invest in real estate compared with turnover. We believe the deal sets a realistic floor on the value of LEP, some 10% or more above the current market price. In combination with the high yield, tax deferred to a large extent for the next years, LEP is an attractive proposition for the longer-term investor focused on yield with growth prospects. ALE expects distributions to be 100% tax deferred for FY08 and FY09 and at least 75% tax deferred for FY10 and FY11. It had earlier expected 50% deferral for FY12 also. For many clients this can be as good as franking. For 1H08, LEP total distribution was 16.75¢ per security, up 6.7% on Dec 06. This is 0.97¢ below distributable income. Property assets were revalued to $836m, reflecting the November 2007CPI rent increase. The security buyback to date is 5.8% or $21.6m. The $245m CPI Hedge transaction in December 07 (below) adds significant distributable cash flow. 100% of LEP’s debt remains hedged for a weighted average of 11.9 years. For 1H08, against revenue of $26.0m, borrowing expense was $14.6m, management expense $1.3m, Land Tax $0.8m. Distributable Fair Value Gains were $6.0m. Total liabilities were 66% of total assets. FY 08 total distribution guidance remains at least 33.5¢ per security. Valuable acquisition opportunities are expected to become available. Major investments by ALH are enhancing the value of ALE’s properties as ALH makes leasehold additions and enhancements to ALE’s buildings. ALH takes development risk; it has been active in adding Dan Murphy outlets and is a natural partner in future pub acquisition prospects. Leases to ALH mostly run to 2028 plus four 10 year options, indexed annually to CPI (state based). Leases are ‘triple net’ – ie. ALH pays all insurance, maintenance and outgoings (except land tax in QLD). Recommendation Impact LEP is attractive for its double-digit yield, likely to be largely tax deferred to 2012. The portfolio is a unique ‘vanilla’ LPT offering steady upside growth.
LEP Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
