U & I Group (UAI LN), London property at a discount


U & I Group, previously called Development Securities, is a property developer, focused in London and the South East. Caught my eye because currently trades at a discount to book value (P/BV x0.64) and offers a decent yield (3.1% currently, analysts expect it to double) and at a reasonable P/E x12. The stock price is -20% year to date, surely uncertainty around Brexit hasn’t helped.

One of the  U&I developments

399 Edgware Rd portfolio

U & I operates under three segments: property development and trading properties (valued at GBP 180m and GBP 80m respectively), an investment portfolio (could be valued at least 200m) and investments in various JVs, booked at GBP 90m


Property development: management targets ROE between x2-x5 times initial equity investment, with a maximum investment size of GBP 15m. How they achieve this spectacular ROE? They focus on an attractive niche: project developments worth between GBP 50m and GBP 100m. These projects are too big for individual property entrepreneurs and too small for many of the property companies.

U & I has a conservative policy valuing property investments at cost until completion. Subsequently, much of the profits from these investments haven’t hit the P&L and remain ‘dormant’ on balance sheet. Management expects GBP 55M of property gains in the fiscal year ending February 2016, GBP 23m of which are already recognised in first half. Management expects an additional GBP 115m over the next two years, which is about half current market cap.

U&I collaborates closely with local councils in building regeneration projects. This segment was strengthened in 2014 after the acquisition of “Cathedral” at just above the net asset value. In regeneration projects, the land element is typically contributed by the local council, offering higher return on equity to U & I.

The investment portfolio has a net rental yield of about 7%, these asset spread across the country with occupancy of 95% or above and occupiers like Waitrose and Matalan.  
Management uses the rental income from investment portfolio to fund the property development segment.

Management’s incentive plan is based on NAV per share growth, full payout targets 12% growth p.a for the next 4 years. I think the bar could be set a little higher. Nonetheless, the Deputy CEO owns 2% of the shares.
Net Debt comes quite high at GBP 215m but loan to value is 45% and average interest rate 6% which could move to less than 5% as projects mature.