Share

Glaring value discrepancy

The market often differs with official company valuations about key assets – the classic sceptical mispricing being the value accorded to VenFin’s holding in Vodacom before the Vodafone buyout offer. However, Finweek doubts investors will ever see a valuation discrepancy quite on the scale of that seen in the year to end-February interim results for Quantum Property Group.

Quantum has a single asset: the upmarket 15-on-Orange hotel and leisure development near the Company Gardens in Cape Town. Quantum puts a value of more than R900m on that development (which opened its doors in late 2009). After stripping out around R500m in debt, the intrinsic value of Quantum is stated as 260c/share.

The last traded price for highly illiquid Quantum shares on the AltX was 33c… although some optimistic seller is offering a batch at 65c. Even if we assume an average price of 50c for Quantum, the share is trading at a discount of more than 80% to its tangible NAV. Put another way, the market is suggesting the 15-on-Orange development – which cost more than R400m to develop – is worth a mere R50m.

It’s not difficult to see why the market is sceptical to the point of seemingly putting a delusory liquidation value on Quantum’s flagship asset. For one thing, it has some serious debt to service. Second, the upmarket hotel segment in Cape Town is heavily overtraded. It seems 15-on-Orange is – judging by the R14m revenue generated over the interim period – trading at reduced rates with occupancies between 50% and 54%. The top line yield – taking the R900m value into account – is below 3%.

Quantum CEO Gary Shaff says the hotel needed to make a choice about securing business in the lull after last year’s Soccer World Cup. “You could either hold prices high and trade at very low occupancies, or you could take down your rates and build up clientele for better trading days.”

But Quantum’s problem is that 15-on-Orange isn’t washing its face. The top line business was wiped out by operating costs of R15m – and then those operating losses were compounded by a R20m finance charge. Quantum is looking at ways to overcome that squeeze and has started looking to utilise space more effectively and is rumoured to be considering a venue facility.

Shaff reckons new in-house developments could bring in an additional R6m/year. Penthouse suites developed for sale are also being let out, which also means an additional income stream of around R3m/year.

However, the bigger challenge is refinancing/restructuring a R468m loan with Absa. Currently, the cash flow from 15-on-Orange is simply not enough to cover the interest bill. Shaff says a debt restructuring plan is being finalised and will probably involve the issuing of debentures to institutional investors. He says the identity of possible new backers for Quantum can’t be disclosed, as negotiations are still at a sensitive stage.

Finweek estimates Quantum would need to refinance at least R125m (although R85m could be earned from sales of penthouse properties) of the debt owed to Absa and assumes any new backers would be requiring some serious security in exchange for their support.

While its share price looks fundamentally cheap on paper, the debentures no doubt will be priced to what we’d term a “more realistic revaluation” of 15-on-Orange.

Shaff concedes directors have applied their minds to whether 15-on-Orange should be written down in value. He suggests such a decision will only be articulated in the company’s year-end results.

Until those year-end results are released (in November this year) or the refinancing agreement is disclosed, Finweek would expect the market to continue its cynical guesswork about 15-on-Orange’s real value.
We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.00
-0.5%
Rand - Pound
24.02
-0.5%
Rand - Euro
20.51
-0.2%
Rand - Aus dollar
12.35
-0.0%
Rand - Yen
0.13
-0.6%
Platinum
900.15
+0.4%
Palladium
1,000.00
-0.2%
Gold
2,209.06
+0.7%
Silver
24.59
-0.2%
Brent Crude
86.09
-0.2%
Top 40
68,122
+0.7%
All Share
74,310
+0.5%
Resource 10
56,908
+2.2%
Industrial 25
103,615
+0.3%
Financial 15
16,488
-0.2%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders