Sigma Capital Group New funding structure to finance project growth Joint venture with Gatehouse Bank Real estate Sigma has secured its first JV based on its new institutional funding model. This has been designed to facilitate a material increase in the scale of residential development carried out by its JVs with public sector partners. The JV with Kuwait s Gatehouse Bank expects, subject to securing development debt, to deliver c 2,000 units in an initial two-year period and potentially another c 4,600 rental homes if subsequent phases are committed. Gatehouse has agreed to inject the equity component and both partners are in negotiation with lenders to secure construction debt. Although Sigma will not report full details of the fee structure until the debt is in place, we anticipate that it will earn revenues from delivery of discrete components of an agreed development programme over a three- to fiveyear project term. It will include sourcing land and debt plus management of the development, letting and investment portfolio. 19 December 2013 Price 40.00p Market cap 18m Net debt ( m) at 30 June 13 0.3 Shares in issue 45.9m Free float 65% Code SGM Primary exchange AIM Secondary exchange N/A Share price performance Year end Revenue** ( m) PBT* ( m) EPS* (p) 12/11 2.5 (0.9) (2.1) 0.0 N/A N/A 12/12 2.3 (0.3) (0.7) 0.0 N/A N/A 12/13e 5.6 (0.4) (1.0) 0.0 N/A N/A 12/14e 2.5 0.2 0.4 0.0 100.0 N/A Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. **12/13e includes 3.4m pre-sales from North Arran Way. JV to deliver initial 200m portfolio of 2,000 homes The new joint venture could potentially create one of the UK s largest new-build residential housing portfolios. Sigma s key contribution, in addition to its project management experience, is derived from its ready access to substantial residential development land with planning consent from its three existing local authority partnerships. The funding structure is designed as a template, which can enable the group to meet existing and potential future partners identified needs for significant new social and affordable housing. Interim results DPS (p) P/E (x) Yield (%) We have reviewed progress made by the group s existing property services and residual VC operations in the first half. The major changes to forecasts reflect delayed timing of existing developments. We have not yet included any contribution from the new JV, but will update forecasts to reflect potential fees once Sigma confirms it has secured debt finance. Valuation: Underpinned by JV prospects We will update our forecasts for the new JV when the debt is secured. However, the shares are up c 63% since the deal was announced, reflecting potential property division revenues based on an estimated 2bn urban regeneration pipeline in existing JVs and 1bn at Winchburgh. At agreed fee rates for project management and finance, 4-5m pa of revenues are possible over a five- to seven-year period. The new institutional funding model is designed to unlock this and create a template to finance future residential projects. % 1m 3m 12m Abs 73.9 85.0 553.1 Rel (local) 78.9 85.9 483.7 52-week high/low 40.0p 6.1p Business description Sigma provides urban regeneration, property development, financing and asset management services to a contracted private and public-sector client base, the latter in Liverpool, Salford and Solihull. A VC fund management arm is in winddown. Next event FY13 results April 2014 Analysts Roger Leboff +44 (0)20 3077 5700 Martyn King +44 (0)20 3077 5745 property@edisongroup.com Edison profile page Sigma Capital Group is a research client of Edison Investment Research Limited
Boost from new JV Sigma has announced a JV with Gatehouse Bank, a London-based, Shariah-compliant investment bank with real estate interests in the UK and US. Gatehouse has committed to provide the equity required to underwrite the 200m development cost, including debt, of an initial tranche of c 2,000 rentable homes in Greater Manchester and Liverpool. The two partners currently seek secured construction debt facilities with prospective lenders for this initial tranche, construction of which Sigma expects will take 24 months, with homes delivered on a phased basis. The first tranche alone would represent one of the UK s largest new-build residential housing portfolios. The terms of the JV provide potential for delivery of up to c 6,600 units and Gatehouse has retained an option to provide the equity element required for the second tranche of c 4,600 new homes. That phase has an anticipated gross development cost of c 500m. Sigma s contribution to the JV includes sourcing residential development sites, underpinned by its three existing local authority partnerships, which provide ready access to residential land with existing planning consent. The initial tranche of c 2,000 new rental homes is likely to be accommodated from the group s partnerships with Liverpool and Salford City Councils on 22 sites totalling more than 90 acres across Greater Manchester and Liverpool. Revenue model: Potential for contribution from FY14 We have not sought to project returns from the new JV at this stage, but await the details of the JV fee structure due to be disclosed on receipt of construction debt. The new funding arrangements are an extension of the group s existing property services business model, which generates fees from three areas: urban regeneration development projects; completed portfolios; and access to property finance. These provide the group with revenue visibility for typically a one- to two-year life related to a discrete project. Once funding is secured, the initial transaction with Gatehouse will have an initial two-year life, but can potentially be extended beyond that. We anticipate that the fees will to some extent match Sigma s existing arrangements with its local authority JV partners, in which case it could potentially generate revenues from: land procurement; delivery of new residential units; management of the lettings process; and participation in growth in capital values of assets developed. Actual returns will also pivot on development costs and profit. Notional development profit will be a function of the pre-agreed valuation of development land sourced from Sigma s local authority partnerships; construction cost and interest on the development facility; and the way in which the letting and purchase of completed properties has been underwritten at inception. Sigma expects construction of the first phase of rental homes to commence shortly after debt is secured and to be completed and let within 24 months. An average c 100,000 cost per unit including land makes these relatively affordable homes, which we expect to be built in substantial phases by an experienced large-scale UK house builder. Institutional funding model: Template for future schemes The institutional funding model has been designed as a template suitable for similar arrangements with existing and new partners, as a way to allow the group to deliver large portfolios of new affordable and rentable homes in areas with significant housing shortages. Sigma reports that it is already in discussion with other local authority partners that may be interested. Sigma Capital Group 19 December 2013 2
Interim results: Progress on regeneration schemes In September, the group reported interims to end June 2013. There was a slight decrease in group operating losses to 0.3m (H112: 0.6m loss). Revenues doubled to 2.2m (H112: 1.1m). 1.2m (H112: nil) was contributed by the group s North Arran Way office and retail development within its North Solihull JV, which Sigma is managing. Excluding that scheme, property related revenues were up 12% y-o-y at 0.65m. The turnover of the group s venture capital fund management activities, which are progressively being wound down, fell to 0.3m (H112: 0.5m). Exhibit 1: Results summary H112 H212 H113 H213e Revenue 1,090 1,236 2,156 3,447 Cost of sales 0 0 (1,187) (2,167) Gross profit 1,090 1,236 969 1,280 Other operating income Profit on disposal of VC equity investments (7) 0 20 0 Unrealised profit on investment revaluations (277) (549) 49 0 Administrative expenses (1,377) (1,198) (1,378) (1,276) Operating result (571) (511) (340) 4 Net finance income 19 3 3 3 Share of loss of associate (95) (16) (76) 0 Exceptional 0 0 0 85 Pre-tax profit (647) (524) (413) 92 Adjusted pre-tax profit (354) 55 (466) 24 Tax 0 0 0 0 Profit after tax (647) (524) (413) 92 Basic EPS (1.42p) (1.15p) (0.91p) 0.20p Normalised EPS (0.78p) 0.12p (1.02p) 0.05p Source: Sigma interim results, Edison Investment Research estimates The combined group reported a 0.34m operational loss for the first half. Taken separately, trading losses in the property division fell 61% to 0.1m and the VC division loss was 0.1m, versus a profit of 0.1m in H112, with the balance accounted for by holding company costs. The pre-tax loss improved by 36% to 0.4m, including Sigma s share of losses made by its associate company, Frontier IP Group. Since the half-year end, Sigma has reduced its share in Frontier IP from 26.86% to 3.19% and will in future account for its remaining holding as an investment at bid price. We see potential for significant growth in recurring revenues from the successful roll-out of the institution funding model, the first example of which is the JV with Gatehouse Bank referred to above. Although details of fees have yet to be disclosed, Sigma should benefit from the deployment of funds to finance substantial, primarily residential development, and potentially over the longer term from a share of any increase in the value of the assets held by the individual funds. Property: Urban regeneration and asset management Sigma s urban regeneration revenues are derived from work carried out within three partnerships with local authorities, Liverpool, Salford and North Solihull. These projects provide Sigma with visibility on a large proportion of the fees due at each scheme s inception, although part is contingent on ultimate development profit and capital deployed. It also generates asset management fees from managing two developments, at Winchburgh in Edinburgh and City Wharf in Aberdeen. These generate fixed fees, with a small proportion based on meeting performance targets. We review below the progress made by these activities during the first half and their impact on our full year forecasts. Sigma Capital Group 19 December 2013 3
Regeneration Liverpool The Regeneration Liverpool partnership reported higher activity in H113 on a broader range of projects. It has so far finished 131 homes at the Norris Green development, a 100m housing scheme and begun construction of the third phase of 63 new homes in March 2013 and the fourth phase of 167 units in June 2013. Sigma is due to receive c 0.22m for phase three; c 0.12m paid over 18 months and the balance on completion. For phase four, it will receive c 0.6m, c 3.4% of the gross development cost; around half over the next three years and the balance on completion of sale of the homes, construction of which is due to finish in December 2017. In March the JV signed a land option agreement to develop a 7.4 acre commercial site near Lime Street Station in the city centre, scheduled for 2014-20. In August, it signed an option agreement to develop a 12 acre site (formerly Queen Mary School) into 164 new homes for both open market sale and for rent. The total gross development value of this scheme is c 27m; it will generate around 0.8m in fees for Sigma over the next five years. Construction is due to commence in 2014. North Solihull Partnership The North Solihull Partnership secured the forward sale of its 30,000sqft commercial and retail development, North Arran Way, at the start of this year and began construction in March. Sigma has begun to draw a 4.045m facility from the government s Growing Places Fund to finance the development, due to complete in January 2014. North Arran Way is expected to generate c 0.3m fees and profit for the group as the developer of this project. The interim results included a portion of the total anticipated sales and development costs, based on the percentage completion at the mid-year. The loan will be repaid 10 days after practical completion from an agreed forward sale of the development. Sigma also commenced construction of the infrastructure works and enterprise centre at Craig Croft in North Solihull in May; completion is due by April 2014. Salford Higher Broughton Partnership The partnership had sold 25 of the 80 housing units at the Top Streets development by end August 2013. It has received detailed planning consent for a new healthcare and retail scheme valued at c 9m at another site, Newbury Place, and expects contractors on site before the end of the year. Asset management Winchburgh, Edinburgh The residential development at Winchburgh, situated eight miles west of Edinburgh, is the main focus of the group s asset management operations. It is managing the project implementation phase and its five-year management contract is expected to generate 1.8m in fees over the contract term, with potential additional performance-based remuneration. Since it was granted planning permission in principle by West Lothian council in April 2012 it has concluded sale agreements with four national house builders for residential development plots totalling 367 houses, and discussions are underway with a fifth house builder for a further 111 units. Detailed planning permission has been issued for 478 plots. VC fund management: Exit sought for legacy holdings Sigma is still working on a full exit from its remaining VC fund management activities, which comprise fund management and limited partner interests. In H113 an investment company, i-design group, was taken over in a sale that generated 0.2m of total cash for Sigma. Following the disposal, it held 15 company investments in four venture funds, and the carrying value of its limited partner interests in those funds at the mid-year was 0.6m (2012: 1.2m). Sigma Capital Group 19 December 2013 4
Disposal of holding in associate company Frontier IP Post the mid-year Sigma sold 2.905m shares in associate company Frontier IP Group at 10p/share, which reduced its interest from 26.86% to 3.19%. This generated net proceeds of 0.3m and an expected 0.1m profit. As Frontier is no longer an associate company, Sigma will account for its remaining 0.6m shareholding as an investment at bid price. Financials We have trimmed our forecasts for this year as a result of slightly delayed property project starts. We do not regard this as material to group prospects, which pivot almost entirely on completion of the financing for the Gatehouse JV. That would potentially unlock a significant increase in the scale of the residential development portfolio and associated fees, and possibly establish a precedent for further similar arrangements. Sigma had 0.3m of net debt at the end of June 2013 (H112 net cash of 0.7m). This debt has been provided by the UK government s Growing Places Fund and relates to North Arran Way, the only instance where Sigma is acting as the developer. We forecast net debt at c 3m at the current year end, which will be repaid entirely on completion of the development scheduled for January 2014. The North Arran Way development is expected to generate c 0.3m of fees and profit. Group cash balances will also benefit in H213 from the Frontier IP sales proceeds. The first half included significant investment of management time to develop its institutional funding model, the benefit of which will not be reflected in the financial performance until FY14 at the earliest. Excluding contributions from the new JV, our projections are that recent growth in the project pipeline puts the property division on track to contribute a full year trading profit in FY14. We have not built VC exits into our projections. Realisations at 50% of book value would generate c 0.35m, but exit timings would affect retainer fees. Valuation The shares responded very positively to news that the first JV had been secured and pushed up the market cap to 18m. However, it is not yet possible to accurately quantify potential returns from the new JV, as there has been no detail on fees. However, subject to securing construction debt, it appears to represent a step change in revenues, as Sigma has access to a pipeline of urban regeneration projects with an estimated 2bn valuation in its existing local authority JVs, plus c 1bn within Winchburgh. If it can finance and progress these, it should be able to generate a steady fee income stream over at least the next decade. We have previously assessed these in terms of a potential c 4-5m pa of fee income, and if Sigma secures funding for c 10% of that, possibly another 0.3-0.4m pa of commission revenue. The new JV underlines the growing importance of Sigma s property advisory operations, with the VC funds business and associated investments in wind-down. We still expect property to become the group s sole operation during FY14. However, we have not incorporated any contribution from the JV in our current forecasts, as we await clarity on the fee structure when debt facilities, currently under negotiation, are secured. These are expected to be concluded during the first quarter of 2014. That would suggest that the first major contribution to revenues and profit from the Gatehouse JV will be in H214 at the earliest, as construction of the first phase of c 2,000 units will not commence until the debt is in place. Sigma Capital Group 19 December 2013 5
Change in significant shareholding: WCC sells down to 2.26% On 2 December, Sigma reported that Sir Tom Hunter s investment vehicle, West Coast Capital Investments, had recently reduced its holding in the group from c 10m shares (21.9% of the issued capital) to 1.04m shares (2.26%). Henderson Global Investors has increased its stake from under 5% to just under 14%. Exhibit 2: Financial summary '000s 2010 2011 2012 2013e 2014e December IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 1,836 2,468 2,326 5,603 2,517 Cost of Sales (55) 0 0 (3,354) 0 Gross Profit 1,781 2,468 2,326 2,249 2,517 EBITDA (507) (704) (187) (354) 181 Operating Profit (before amort. and except.) (535) (723) (210) (372) 175 Goodwill & Intangible Amortisation (1,366) (123) (24) (18) (18) Provisions & other (28) (139) (22) 5 (15) Exceptionals 0 0 0 0 0 Operating Profit (1,929) (985) (256) (385) 142 Net Interest 31 15 22 6 8 Unrealised profit/(loss) on revaluation of investments (417) 3 (826) 49 0 Provisions/other losses (1,250) (1,020) 0 85 0 Profit Before Tax (norm) (1,754) (936) (299) (442) 183 Profit Before Tax (FRS 3) (3,565) (1,415) (1,171) (321) 150 Tax (10) 0 0 0 0 Profit After Tax (norm) (1,764) (936) (299) (442) 183 Profit After Tax (FRS 3) (3,575) (1,415) (1,171) (321) 150 Average Number of Shares Outstanding (m) 46.6 44.2 45.6 45.6 45.7 EPS - normalised (p) (3.7) (2.1) (0.7) (1.0) 0.4 EPS - normalised and fully diluted (p) (3.7) (2.1) (0.7) (1.0) 0.4 EPS - (IFRS) (p) (7.6) (3.2) (2.6) (0.7) 0.3 Dividend per share (p) 0.0 0.0 0.0 0.0 0.0 Gross Margin (%) 97.0 100.0 100.0 40.1 100.0 EBITDA Margin (%) -27.6-28.5-8.0-6.3 7.2 Operating Margin (before GW and except.) (%) -29.1-29.3-9.0-6.6 7.0 BALANCE SHEET Fixed Assets 4,281 2,251 1,645 1,268 1,244 Intangible Assets 2,209 322 614 596 578 Tangible Assets 15 41 26 16 10 Other - investments, financial assets etc 2,057 1,888 1,005 656 656 Current Assets 2,408 2,304 1,833 6,989 1,678 Trading investments 53 172 45 2 2 Debtors 389 606 688 1,463 387 Cash 1,821 1,265 1,024 948 1,137 Other 145 261 76 4,577 152 Current Liabilities (1,007) (802) (881) (5,950) (450) Creditors (1,007) (802) (881) (1,950) (450) Short term borrowings 0 0 0 (4,000) 0 Long Term Liabilities 0 0 0 0 0 Long term borrowings 0 0 0 0 0 Other long term liabilities 0 0 0 0 0 Net Assets 5,682 3,753 2,597 2,307 2,472 CASH FLOW Operating Cash Flow (1,622) (379) (292) (4,560) 4,181 Net Interest 33 15 22 6 8 Tax 0 0 0 0 0 Capex 0 0 0 (8) 0 Acquisitions/disposals 50 (142) 29 469 0 Financing (158) (50) 0 16 0 Dividends (94) 0 0 0 0 Net Cash Flow (1,791) (556) (241) (4,076) 4,189 Opening net debt/(cash) (3,612) (1,821) (1,265) (1,024) 3,052 HP finance leases initiated 0 0 0 0 0 Other 0 0 0 0 0 Closing net debt/(cash) (1,821) (1,265) (1,024) 3,052 (1,137) Source: Sigma Capital Group accounts, Edison Investment Research Sigma Capital Group 19 December 2013 6
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Frankfurt +49 (0)69 78 8076 960 Sigma Schumannstrasse Capital 34b Group 19 280 December High Holborn 2013 245 Park Avenue, 39th Floor Level 33, Australia Square Level 15, 171 Featherston St 7 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1162 264 George St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand