RDC's bid to acquire a significant slice of PrimeTime could resolve both companies' liquidity and debt issues
RDC offering shares because it doesn't have enough cash on hand for an outright purchase
Further debt with its current LTV could breach certain debt covenants
PrimeTime undervalued – Analyst
RDC Properties Limited has submitted its proposal to acquire shares of PrimeTime Property Limited. RDC offers 0.6875 of its units for each PrimeTime unit, seeking to get more nearly half of the total PrimeTime units available. To do this, RDC might need to issue up to new units of its own.
According to a communique published on the Botswana Stock Exchange (BSE), PrimeTime unitholders can choose to exchange some or all of their PrimeTime units for RDC units. Should RDC not accept all the PrimeTime units offered in the exchange, they will accept them in proportion to the amount each unitholder offers. This means if RDC can only accept part of the units offered from a shareholder, they’ll accept a fair share from everyone based on how many units have been submitted.
For the proposed swap, PrimeTime investors would get 0.6875 RDC units for every 1 PrimeTime unit they exchange. According to a communique by RDC, this implies each RDC unit is valued at P2.40 which is the current trading price while each PrimeTime unit is valued at P1.65.
The worth of PrimeTime has sparked intense discussion in the market. RDC’s valuation, set using prices from June 20, 2024, indicates a premium on PrimeTime units, which were trading at P1.60 as of Friday, June 16, 2024.
Golden Capital says Primetime is undervalued
Golden Section Capital has determined that PrimeTime is currently undervalued. They estimate that a fair price for PrimeTime units one year from now should be P2.29 each. Golden Section predicts a potential increase of 42.29% from the current price of P1.60, suggesting that the share price could return to the level it was at in December 2021.
“The company is undervalued at present, trading at 30% below Golden Section Capital’s justified value of P 2.29 (and 34% below current Net Asset Value ‘NAV’),” Analyst Garreth Elston wrote in a research note issued on July. “Given the portfolio quality, extremely low vacancy, good locations, improving momentum, but despite being tempered by high Loan – To – Value ‘NAV’, and difficulties in the Zambian market, the company’s NAV discount of 53.9% is unjustifiably low.”
Depressed shareprice inflates yield
The share, as with most of Botswana’s listed property companies has low liquidity, as indicated by Golden Section. On a rolling one-year period from June 2023 to June 2024, 4 880 037 shares were traded, an average of 17 305 per day (but the reality is that only 59 days saw trades during the period).
Golden Section showed that PrimeTime’s distributions have been on a steady trajectory post 2020’s negative impacts with the current yield of 7.23% being attractive above that of RDC. But Elston pointed out that is arguably inflated by a too-depressed current (P1.60) share price and should be closer to a 5% to 6% yield range going forward.
PrimeTime has lagged the Botswana-listed property peer group and hence Golden Section used a market capitalisationweight approach to construct a Botswana-listed property sector benchmark. In Total Return terms, PrimeTime has returned -3.08% compared to RDC’s 7.84% and the Sector’s 8.05%.
RDC says combined portfolio will reduce LTV
PrimeTime Group’s loan-to-value (LTV) reduced from 53% in 2022 to 51% in 2023, and again to 49% in 2024 interim. While the declines are on a pleasing trajectory, Elston noted that they are still 9% above what “we would consider to be the optimal range of debt for a listed property company (of 35% to 40%)”. “We envisage lower debt costs over the upcoming year, continued revenue growth, and lower general expenses as the company continues with its cost-cutting initiatives,” Elston wrote.
In February 2024, the Group raised P 20.1 million net proceeds from a capital raise, which resulted in the issuance of 11.8 million linked units. The proceeds from the capital raise were applied to reducing existing debt. The group’s strategy to control debt appears to be paying dividends, and Elston hopes to see LTV continue to decline significantly.
RDC expects that the combined portfolio with PrimeTime would provide the opportunity to reduce the combined loan-to-value to a targeted level of c.35% over the 12 to 24 months post-implementation of the Potential Transaction. Its loan-to-value as at 31 December 2023 was 43.3%. RDC is essentially offering shares because it doesn't have enough cash on hand for an outright purchase and it can't take on any further debt with its current LTV, which could result in them breaching certain debt covenants it has in place.
PrimeTime’s debt problem
Elston views that debt costs remain a significant drag on PrimeTime’s costs.
“2023 saw the cost of debt increase by approximately 17% year-on-year mainly driven by Zambia and South Africa, and the group Weighted Average Cost of Debt (WACD) went up from 6.9% to 8.1%,” Elston said adding that the company has approximately 40% of its debt fixed, and the bulk of debt will expire in 2026 this should result in more attractive debt costs and improved fixed-rate rates. P139 million loan facilities are set to expire/amortise in the 2024 financial year.
Rate cuts to reduce interest expense
Around the world, most central banks are leaning towards lowering interest rates reflecting inflation expectations. The Bank of Botswana's decision to cut the benchmark rate is seen as a positive move. The rate cuts, combined with generally more favorable economic conditions, are expected to lead to solid growth for property companies.
Kgori Capital’s Chief Investment Officer, Tshegofatso Tlhong, noted that lower interest rates have positively impacted property companies with debt, as their interest expenses are decreasing.
Elston said any increases in funding costs, coupled to slower than expected interest rate decreases in all the markets PrimeTime operates in will negatively impact estimates of fair value. “Continued low trading levels could also result in pricing asymmetries continuing.” RDC anticipates that the transaction will improve unit liquidity.
PrimeTime offers value
Golden Section believes that PrimeTime currently offers compelling value through a solid portfolio, well-managed buildings, experienced management, and is positively positioned for future growth.
“We also expect improved trading conditions in South Africa post the recent elections there, an improving outlook for rate cuts, and improved economic growth to drive better returns. We envisage improvements in Zambia taking a while longer to manifest, but the improvement in letting since FY 2023 and the low debt levels should see trading improvements coming through, but these will depend on political stability and growth in the country.”
Downside risks include political instability in South Africa and Zambia, resulting in adverse market valuations, income, and currency movements.
RDC believes this transaction provides immediately improved sector and geographic diversification through the combined group, through greater exposure to the residential and industrial sectors for RDC unitholders, and access to the Croatian market for PrimeTime unitholders.
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