Accelerate Property Fund Limited


Company Overview
APF, a real estate investment trust domiciled in South Africa, did not commence business until December 12, 2013.  Subsequently, it became listed on the Johannesburg Stock Exchange. APF affords investors the opportunity to profit from the real estate even if they do not have the huge capital to buy properties directly. The company invests in properties that produce streams of income that would be distributed to the unit holders.

The company boasts of 58 properties in South Africa, 6 in Austria and 3 in Slovakia. The company acquires and redevelops properties with more focus on the retail segment of the market. The company derives roughly 74% of revenue from the retail segment of the market. In a bid to boost revenue and spread risk, APF has embraced property acquisition overseas.

Mr. Tito Mboweni chairs the board which comprises four executive directors and six non-executive directors.  Mr. Michael Georgiou is the chief executive officer of the company.

Investment Thesis
AFP has a portfolio of 67 properties worth R12.3 billion. We believe that Fourways Mall development would improve shareholders' value when completed. Fourways, Johannesburg, has a good transport network and capacity to attract  office and retail accommodation tenants. South Africa accounts for 89.4% of gross leaseable area and 91.7% of turnover of AFP.

The European operation made revenue of R100.1 million at year end (March 31, 2018) which translates to 8.6% of total revenue in the year under consideration.Earnings chart of Accelerate Property Fund

In addition, the retail segment is expected to drive earnings growth of the company. At present, there are 38 retail properties out of which 9 are in Central and Eastern Europe. The retail segment accounts for roughly 74% of revenue and 72.2% of operating profit.  The revenue from this segment more than quadrupled the level posted in 2014. Besides, the retail market segment has the lowest vacancy rate and the highest lease period. However, this segment may experience sluggish growth because of the recession in South Africa which   accounts for about 90% of the revenue from this segment.

Property acquisition has led to dilution and mounting debts. We believe that this would pave way for AFP to broaden revenue sources going forward.

We are of the opinion that overseas markets should be explored to boost AFP's earnings. The current economic conditions could make vacancy rates to escalate and impact revenue adversely. But the relatively long lease period of some of its properties could be a cushion. In addition, its retail business would help weather the storm.

Revenue has been growing by 18.4% in the past three years. Investors enjoy tax benefits as they are exempted from capital gains tax and they do not have to pay securities transfer tax whenever they buy and sell their shares.

AFP trades at 5 and 5.4 times earnings and sales respectively.  Currently, it trades at R5.00 which is below our estimate for a share in the company.  We advise investors to pay below R7 per share. We are of the opinion that investors could earn 46.3% return on their investment in three years' time.

Financial Overview
AFP posted revenue of R1.2 billion at year end March 31, 2018. Though it produced 56% of total revenue, retail segment recorded a revenue decline of 2.3%. Revenue from the office and industrial lease improved by 13.4% and 7.2% respectively.  The greatest year-on-year revenue improvement comes from its European operation (247%).

Operating profit gained 11.3% (19.6% in 2017) while operating profit margin rose marginally by 1.3%. Industrial lease has the lowest operating profit margin; however, its operating profit margin of 6.6% for 2018  outdistanced its five-year average of 5%. Net profit has been rising while net profit margin was 94% at the end of the year under review.Graph of returns of Accelerate Property Fund

The management has reined in property expenses; property expenses as a percentage of revenue lost 5.7 percentage points between 2014 and 2018.  Total debts are rising; though AFP can meet its interest obligations, short-term liquidity may be threatened if short-term debts are not contained. But we believe that long-term solvency is not in doubt.

Business Risk
The raging economic meltdown in South Africa would make earnings vulnerable. The accumulation of more debts, especially short-term debts may pose liquidity problem and affect profitability adversely.

Recommendation: Buy

Vital statistics of Accelerate Property Fund