Uncertain times call for cautious decision-making. Over the past month we’ve seen the return of some volatility in financial markets. Note the word "some". It has been a very long time since we’ve seen any real volatility, and now when the market gyrates a little, it feels like the end of the world.
I suppose that statement requires some context. US markets have had a long period of excessively low volatility and stable prices. SA has not been that lucky. Our market has churned sideways for almost four years now and has not really offered any real return.
Given that the election is now behind us and that the outcome was almost the best-case scenario for SA, it is disappointing that our market has not responded with a much stronger rally.
That this best-case rally has not happened as expected is mostly due to the adverse pressures that international markets are exerting on our market. The trade dispute between the US and China is hotting up and that is removing risk appetite for emerging markets. Nonetheless, the outcome of our election was almost in line with the best possible case for international investors and thus once we start to see some of the promised reforms in the government, we should start to see some favour for SA assets.
Until then, though, it is best to be cautious. The pick of the month, therefore, is based half on caution and half on optimism.
Spear Reit is a property company that listed on the JSE relatively recently. It only has about R3.1bn worth of properties in its portfolio, so it is rather small. All 31 properties it owns are in and around Cape Town and all are either commercial or industrial properties, or hotels. The portfolio has a 98% occupancy rate, which is great considering that vacancy rates in Sandton, Joburg, are on the rise.
The fact that the properties are in Cape Town is what stands it in good stead. The Western Cape is the best-performing province in the country and once favour for emerging market assets returns, Cape Town is likely to be a big winner.
There is some debate about residential property prices in Cape Town being overvalued; demand for living space in the city seems to be slowing.
Living space and working space is not the same thing, though, and with a 98% occupancy rate and strong international companies and locally listed companies as tenants, stability and safety are the words that come to mind.
The stock offers a dividend yield of 8.54% and at R10.35 a share is trading at a p:e ratio of 10.53. It is not exactly the most exciting stock, but in a market where property stocks have practically collapsed over the past few years, it offers a steady and stable share price with a decent dividend.
You’ll earn 8.54% on your investment each year with the potential for upside should economic conditions improve, so it seems like a safe place to place a portion of your portfolio.
It is worth nothing that Spear’s asset value is about R3.9bn while its net liabilities total around R1.6bn. Its market capitalisation is only about R1.9bn. Some back-of-the-matchbox calculation means that there is gap of about R300m between market capitalisation and what the company is actually worth, translating into roughly a 15% undervaluation of the share price, thus leaving plenty of room for upside.
Another worthy note is that Spear recently concluded a transaction to purchase another industrial property in Parow, Cape Town, which should add about R850,000 annual revenue. In the grand scheme of things this won’t make too much of a difference, although it shows that the company is actively looking to acquire high-quality industrial properties.
One potential downside is that the company has a track record of issuing shares each year to fund acquisitions. This means that investors are likely to be diluted, or forced to invest more each year to protect their dividend yield, because as the number of shares in issue increases, the R84m in distributions it has paid for the past two years in a row gets split among a larger number of shareholders.
If, however, distributions are saved and earmarked for rights offers, I don’t think this stock will be a bad investment.
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