CIY 0.00% 3.6¢ city pacific limited

huntley's guide

  1. 140 Posts.
    For those interested in CIY, this was in Huntley's Small Companies Guide on 25 June. CIY has since moved up to $2.27


    CITY PACIFIC LIMITED (CIY) $1.96

    Property Trust, Funds, Investments
    Recommendation: Buy for growth and yield
    No. Shares: 60.73m Avg. Monthly t/o: 0.2m
    No. Options: 33.3m Avg. Monthly t/o: 0.1m
    Mkt Cap: $156.3m Initial Review
    Rolling Year High: $2.45 Low: $1.10


    FY00 FY01 FY02 Int03 FY03est FY04est

    Revenue 0.43 1.47 8.98 10.66 21.3 31.0

    NPAT 0.001 0.172 4.03 5.87 11.4 17.0

    EPS n/a 0.3 6.9 9.7 18.8 28.0

    DPS n/a n/a 5.1 6.0 14.0 21.0

    Franking n/a n/a 100 100 100 100

    Funds Under-mgt n/a 69.9 179 350 450 650

    Dividend Yield n/a n/a 2.6 3.1 7.1 10.7

    PER n/a n/a 28.4 20.2 10.4 7.0



    Yield plus growth

    CPY has not been listed for very long but is likely to become much better known in the not too distant future. The company combines a niche property financing activity with the ability to source funds from a public increasingly desperate for relatively secure higher yielding fixed interest outlets. CIY runs three managed funds and has a 56.7% interest in the listed developer and financial services group CP1 Limited.

    The major fund managed by the group is the City Pacific Mortgage Trust (CPMT), which when last declared had $370m under management. With funds under-management growing steadily at $20m per month, that figure is sure to have exceeded $400m by the end of June with total funds under-management approaching $450m.

    Reason for growth in funds

    The reason for the ability to attract funds is the structure of the investment. The CPMT offers unit holders a fixed return, which is currently 7.1% at call or 8.35% for 12-month money. The funds are lent out on property developments, mainly of a short term nature, with strict criteria on locations, type of property and loan to value ratios. The average loan to value ratio between the CPMT and the smaller City Pacific managed fund, which will be mentioned later, is only 67%.

    Loans generally run for between 10 and 18 months and the experience of the developer along with capacity to service and repay is also taken heavily into consideration. Thus even in a hot property market, by relatively conservative lending, the risks are still minimised.

    The second investment fund is the City Pacific Managed Fund (CPMF), which stood at $5m when last reported. The CPMF gives investors a fixed income over a fixed period on a specific project. That gives investors a slightly higher return, averaging around 8.5% at the moment on what is a slightly higher risk as the funds are put in one investment rather than a basket. The same relatively conservative investment criteria are however applied.

    The final investment fund is the City Pacific Private Fund (CPPF). This is a higher yielding mezzanine debt fund, which in some ways mirrors what Biron, which has been previously reviewed in SCG, is doing in the Sydney market. Rates of return have been between 12 and 20% depending on the investment.

    A direct interest in development

    CIY holds 56.7% of the emerging property developer and financial services group CP1 Limited (CPK). This group has effectively only started developing over the last year with its corner stone investment being a 40% interest in what will ultimately be a $600m canal estate development at Martha Cove on the Mornington Peninsula outside Melbourne. The land was acquired cheaply suggesting a low risk investment in an area much in demand.

    Projections have already been made of a $5.40 per share after tax return to CP1 Limited or on a flow through basis $54m to CIY over the period of the land development.

    68 of the first 79 lots in stage 1 of the development sold in the first week it was on the market. The development plan calls for 1,150 sites to be developed over the next 30 months in what should be a company maker for CIY, but subscribers should note that none of this is in the above figures. If the published profit expectations are achieved, earnings will more than double by FY06 to around $40m or more than 40 cents fully diluted for all options. At that stage, dividend would be around 30 cents fully franked.

    A unique listed vehicle

    CIY appears to have come along just at the right time to relieve the pressures on a host of self funded retirees whose fixed interest portfolio returns have diminished considerably in this low interest rate environment. Property will always carry some risk but the location and strict investment criteria followed means that the risks are reduced to the extent possible. That appears to be a major reason behind the success in attracting funds.

    The loans were initially clustered in Queensland, but there is a growing presence in Victoria and New South Wales reflecting the opening of offices in Sydney and Melbourne. We might add there is an increased source of funding from these areas, which gives some confidence that funds under-management will continue to grow.

    Clearly CIY will look at other means of sustaining its growth. Earlier this year, a 14% interest was taken in Terrain Australia Limited, the listed public company. This investment may have been the catalyst for the sale of Terrain's stockbroking arm. The Prime attraction was Terrain's control of Northern City Finance, which writes more than $50m in mortgages per month.

    Summary

    CIY is a rapidly growing hybrid investment with a range of revenue sources. These range from management fees on the funds, establishment fees, mezzanine fees, success fees and we would expect to see emerging dividends from CP1 to add to the base over time. A major reason why we like the group is that costs are tightly controlled. There are 16 full time people only and at last count the cost to revenue base was running at 21.3% What this means is that most incremental revenue will fall through to pre tax profit. For FY04, we suspect that profit could be close to $20m given the percentage of turnover that will fall through to the bottom line but have cut back our estimate to $17m with our likely EPS being reduced from 31.2 cents to a more conservative 28 cents. Bear in mind profit was upgraded by management three times in FY03 and we wouldn't be surprised if this was repeated in the year ahead.

    Interim earnings increased 3,665% from $1.26m to $5.87m on a 264% turnover lift from $2.93m to $10.66m. At that stage, the full year estimates for revenue were increased to $19.3m and profit to $10.3m. That was subsequently increased to $21.2m turnover and $11.4m in profit. In other words, despite management's conservatism, we suspect that the growth being achieved is probably a little higher than they first anticipated.

    What can go wrong?

    There are three areas, which could impact our earnings estimates. Foremost is a downturn in property markets. We expect the high end of property market to come off over the next couple of years but CIY's specifically located, more lifestyle related projects, should hold up well and there is a solid buffer afforded by the average 67% loan to value ratio. Secondly, there can be a slow down in the source of funds, which is always possible. But with these higher yields, as long as management conservatism prevails, we would anticipate a healthy funds flow at least until interest rates start to move up appreciably. Finally there is the risk that insufficient suitable projects can be found to meet the existing criteria. Because CIY is such a small part of the market but is gaining a name for itself as a niche provider of finance, it's hard to see the situation over the next few years where suitably qualified deals can't be generated. We believe that the company has been writing only

    10-20% of applications recetly and that quite a number of qualified deals have been turned away despite the $20m monthly net inflow.

    CIY appeals for its growth and its prospective fully franked 10% plus yield over the next year. This is a unique listed situation, which we expect to hear more about in the future.

 
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