Tradehold: A leaner, cleaner look
Former rand hedge stock Tradehold has reinvented itself as a major player in SA’s lucrative logistics sector
Tradehold has not yet featured prominently on the buy lists of diehard property investors, judging by the hefty 37% discount to NAV at which the counter is trading.
The company’s previously rather complicated structure and diverse interests, spanning various countries (the UK, Zambia, Mozambique, Botswana, Namibia and SA) and different sectors (financial services and real estate), no doubt fuelled perceptions that it is a mixed bag — not entirely a property nor a general equities stock.
However, the company has in recent months streamlined its operations to become a pure property play with a sizeable SA exposure, a move that is likely to place the counter more regularly on the radars of local real estate investors. Not only has it unbundled its financial services division from the property assets with last week’s separate JSE-listing of Mettle Investments, but Tradehold also plans to exit most of its African investments (Namibia being the only exception) and focus on SA instead.
That marks an important shift in strategy. When Tradehold initially listed on the JSE to house the foreign retail property assets of SA billionaire Christo Wiese, 100% of its earnings were generated outside SA.
Tradehold moved into the SA market in December 2016 through the acquisition of the Collins group, a fourth-generation family-owned developer that hails from KwaZulu-Natal. What makes the acquisition of the Collins portfolio and its management team particularly intriguing is the bias towards logistics properties (modern warehouse and distribution centres) — widely regarded as the best-performing subsector of the SA real estate sector.
The acquisition of the Collins portfolio, worth R9.4bn, in one fell swoop placed Tradehold among the JSE’s largest and most experienced industrial property players. Collins also owns a number of properties in Namibia, including the 27,000m² Dunes Mall in Walvis Bay (in partnership with Atterbury) and a City Lodge in Windhoek. Known for its deal-making skills, the Collins family now owns just more than 32% of Tradehold and will help drive the company’s new strategic direction.
Tradehold joint CEOs, SA-based Friedrich Esterhuyse and UK-based Tim Vaughan, believe the company’s repositioning will create a better understanding of its business. It will also allow management to focus fully on two main regions — SA and the UK. "I think the market will appreciate the cleaner, more simplified structure." says Esterhuyse.
Esterhuyse and Vaughan have made impressive strides to grow Tradehold’s assets. In the four years ending February, the company’s property portfolio increased more than 10-fold — from £72.5m (R1.18bn) to £842m (R13.7bn). At the annual results presentation last week Esterhuyse said Tradehold is now moving into a consolidation phase.
Management will continue to bed down the Collins portfolio and has identified smaller, noncore properties worth around R1bn for sale.
Esterhuyse says the decision to sell Tradehold’s eight retail and housing developments in Mozambique, Botswana and Zambia worth £74m was due to the complexity of managing a small number of properties spread over several countries.
The investment case for the rest of Africa has clearly also deteriorated on the back of continuing volatility in oil, commodity and currency pricing. "We did well in [the rest of] Africa but the development returns should be better considering the amount of risk and effort and the high cost of funding involved. We believe we can deploy our capital better in markets where we have easier access to capital and can create scale with a management team on the ground," Esterhuyse says.
Part of the proceeds will be reinvested in the UK, where Tradehold plans to put £160m into refurbishing, repositioning and expanding its £250m UK property portfolio, owned through its subsidiary Moorgarth.
The latter consists of 27 properties, mostly retail and office buildings. The company recently also entered the short-term serviced-office space sector in central areas of London, such as Mayfair, Shoreditch and Covent Garden.
Tradehold’s flagship retail properties include Bolton Marketplace (39,000m²) near Manchester, Broad Street Mall (42,500m²) in Reading, west of London’s Heathrow airport — co-owned with JSE-listed Texton — and Waverley Mall (7,939m²), a joint venture with SA’s Moolman Group next to the iconic Balmoral Hotel in Edinburgh.
Vaughan says Moorgarth is not looking to add new assets to its UK portfolio given the challenging trading conditions amid lingering uncertainty about how Brexit will play out. Instead, the company will focus on unlocking value from existing properties through various asset management opportunities.
A priority is to increase the leisure and entertainment component at Moorgarth’s shopping centres. "Changing consumer dynamics require landlords to evolve their product offering," says Vaughan.
He refers to latest industry figures, which show that leisure spending in the UK has increased by 29% over the past decade and has quadrupled in the past 30 years.
"A decade ago, only 6% of the total floor space in UK malls was allocated to food and beverage offerings. If you want to be competitive today, it has to be north of 20%."
Tradehold has spent £2m on a cosmetic refurbishment of the Broad Street Mall and is awaiting planning approval to add up to 500 residential units on top of the centre.
Vaughan believes Reading is poised for strong growth, as the area will have direct rail access to Central London’s Oxford Road once the new Crossrail system is operational, expected in early 2019. At Edinburgh’s Waverley Mall, plans are on track to add 4,500m² of additional space to house more independent retailers and local traders.
Access to the mall will also be improved, which should lure more of the 29m annual commuters who use the adjacent train station.
Paul Duncan, investment manager at Catalyst Fund Managers, says Tradehold appears undervalued at current levels of around R14.
The company is still regarded primarily as a capital growth play, but it also offers a decent dividend yield of around 3.5%. "Tradehold is starting to look a lot more interesting now that it has cleaned up its structure. The market doesn’t appear to fully appreciate the quality and size of the Collins logistics portfolio," says Duncan.
However, he says there is some concern about the company’s relatively high gearing levels, with a loan-to-value of around 60%, the low free float, which has hampered liquidity, as well as Brexit.
"But if these issues can be addressed, there is potential for the discount to NAV to close significantly," he says.
Would-be investors may question whether the collapse of Steinhoff may have consequences for Tradehold, given that Wiese, Tradehold’s chair, is a shareholder in both companies.
But this fact is the only commonality — Steinhoff and Tradehold have no connection with each other.
Some fund managers have also suggested that Wiese may well be forced to sell shares in a number of his companies to repay debt associated with his Steinhoff interests, which could potentially create an overhang of shares in those stocks.
But Wiese has dismissed these concerns in response to questions from the FM. "There is no reason for the market to be worried," Wiese says. He says he has no intention of scaling back the family’s exposure to Tradehold, as he remains supportive of the management team and its new strategy.
Wiese bought his first shopping centre in the UK nearly 20 years ago and says he remains bullish about property as an asset class, despite the difficulties faced by the traditional bricks-and-mortar retail sector.
"We’ve been hearing for many years that retail is dead. But I believe the negative sentiment is exaggerated. You simply need to adapt your model to meet changing consumer needs."
Wiese says he is excited about Tradehold’s next growth phase.
"We neglected the company for many years while we were building Pepkor and Shoprite. Over the past four years Tradehold has managed to create a solid base and is now well positioned for growth."