APF, ILU – When Dividend Yield is too high to ignore

I first wrote about Accelerate Property Fund (APF) in December 2016, when the stock was trading at R6.50/share.

Much has happened since: The retail collapse has played out in slow motion, the severe mall oversupply in SA has started to reflect in rental vacancies and absent rental escalation, economic stagnation across the country and APF management has been embroiled in the Picvest scandal. (I highly recommend this excellent piece of investigative journalism by Ryk van Niekerk on Moneyweb.)

A combination of the above factors has resulted in the share now trading at R1.75/share. With the market cap reduced to a meagre R1.8bn. However, I have received dividends of more than R2.50, since I first purchased the share in 2015. Are the fundamentals that support the dividend yield still in place?

Fourways remains a good and growing node. Major “super regional” centres such as Fourways mall are in demand and continue to be so. The Eastern European hardware stores (Obi) also continue to do well and may actually represent one of the few successful offshore acquisitions undertaken by SA Inc in the last few years. The business’s property portfolio is valued at R12bn, resulting in a NAV of R7.77/share. Given the often aggressive rental assumptions used to calculate property values, it may be prudent to halve the NAV of the business to R4/share. Even then, the share is currently trading at 40% of NAV.

The dividend has come off somewhat with R0.58/share in 2016, 0.58/share in 2017, R0.51/share in 2018 and 0.16/share for H1 2019. Forecast for FY 2019 is 0.43/share, implying an H2 dividend of 0.26/share. Taking the management at their word, puts the company on a current dividend yield of 25%. Conservatively assuming that the dividend continues at the value of H1 2019, puts stock on a forward yield of 19%.

I made an investment case for Indluplace (ILU), first in March 2017 when it was trading at R11/share and again in March 2019, when it was trading at R7/share. Both investment cases were premised on good, low risk, repetitive dividend yields, which exceed yields of outright ownership of a buy-to-let property. As ILU has been caught up in the overall small cap and REIT sell off, the stock is now trading at R4/share.

The share price sell off can be partially explained by reducing dividends due to operational problems with payouts dropping from R1.05/share in 2017, R0.98/share in 2018 to only R0.78 share in 2019. Furthermore, the company forecasts that 2020 dividends will be 6-9% lower. Assuming a reduction of 10%, results in an expected dividend of R0.70/share in 2020.

Retrospectively, 2017 was not the right time to invest in this business. However, at current levels, the company is trading at 40% of its NAV of R9/share. The forward dividend yield is a whopping 18%. In an environment where Zimbabweans and refugees, immigrants and asylum seekers from other African countries continue to stream into South Africa, I am confident that an investment in low cost housing will prove to be resilient in the medium term. As the company works through its operational issues by strengthening the management team, dividend growth should also resume.

Both companies will also benefit from a reduction in interest rates. I expect the businesses to revalue to more realistic multiples of 90% of NAV and I am happy to collect ridiculously good dividend yields while I wait for the thesis to play out. Both stocks can double and still trade at a discount to NAV and a dividend yield of approximately 10%.

1 thought on “APF, ILU – When Dividend Yield is too high to ignore

  1. Pingback: Overview of Posts | Business Musings

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