The official announcement is out – West Property (WestProp) is coming to the VFEX. We look beyond the hype and dig into the numbers in an effort to understand the value proposition to keen investors. We summarise our analysis in four key segments.
Who is WestProp?
According to its prospectus, WestPropis a real estate developer whose key mission is to spearhead property development in Zimbabwe. Thecompany has an ambitious vision of laying “one billion bricks by 2050” that encompasses the development and construction of Dubai-style buildings in Zimbabwe under the mantra “Bringing Dubai to Zimbabwe”.Key to its vision is the use of technology to augment the experience for their clients. The business uses proptech, or property technology, which refers to the use of real estate technology platforms to build efficiencies in different phases of the asset lifecycle from deal management to portfolio management and beyond. In West Property’s case, the technology will afford residents an array of benefits, which include digital security systems, access control, home automation, energy-efficient lighting, and renewable energy sources.
WestProp’s model creates value through the sale of off-plan shell units and the leasing properties. Off-plan shell units are developments that are sold to customers before completion.
The main reason for this is to offer flexibility to customer as it pertains to final outlook of their property. This concept has been popular with new cluster housing developers in Harare’s leafy suburbs.
The leasehold concept that WestProp has adopted lends from real estate developments in developed markets. In simple terms, WestPropsells and rents residential property with slightly different terms than other real estate players.WestProp is also vague on how much each of these two business models contributes, or is targeted to contribute, to total revenue.
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We performed a relative price-to-earnings valuations which assumed (i) an earnings per share of US0.30 cents in FY23, (ii) an exit price-to-earnings multiple of 15x that was obtained from peers operating in developed markets, (iii) a relative risk discount of 15%, (iv) a premium of 20% to reflect the strong growth expectations by the business in the next 5 years, and (v) a liquidity risk discount of 5% on the basis that WestProp will list on a less liquid exchange. This resulted in a fair price target of US$4.40 per share which is significantly lower than the listing price of US$10 per ordinary share. We acknowledge other valuation methodologies that can be blended with the relative price-to-earnings valuations, but the above model alone provides a good ballpark estimate when used alone.
The preference shares are quite tricky to value given the embedded option to convert to equity. Ideally such an instrument would be valued as a combination of a perpetual preference share and a call option of sorts. Given the complications inherent in valuing options, we simplify the analysisby applying reason. Firstly, the return on the preference shares would have to compete with instruments offering a similar return profile, such as bonds. In our case, we consider the Karo Mining Holdings bond, which offers a coupon rate of 9.5%.
If we use this as a discount rate, we obtain a fair price of US$4.00 for the preference which excludes the value of the embedded option.
However, premiums for dividend participation, voting rights, and the embedded option easily justify the US$5.00 price on offer. In our opinion, preference shareholders will get better value for money compared to ordinary shareholders.
Risks and triggers
We identify (i) liquidity, (ii) market, and (iii) operational risks to an investment in WestProp. The VFEX has been characterised by low liquidity in comparison to the ZSE. Chief reasons include low visibility and a lack of confidence in the formal monetary systems by the market as it pertains to the greenback. As a result, we opine that it highly likely that WestProp could experience some price weakness in early trades post listing.
We also add that the proliferation of similar offerings in the market could result in a competition for the same dollar, which could put pressure on margins. Roads such as Coronation Avenue in Greendale, Edinburgh in Borrowdale, and West Road in Avondale paint a picture of a strong response to the gap in the residential market that WestProp is also seeking to capitalise on.
We also reiterate that WestProp’s operations also pick up risks from dynamics in the construction materials sector. Materials such as fuel and cement have seen volatility in prices because of a myriad of global and local factors, and these pressures are often passed to property developers. On the other hand, we note that the recovery of the global economy, however, unlikely, serves as a potential trigger that could warrant WestProp’s target of selling 1,300 units in a year by 2027 with the support of diaspora remittances.
In conclusion, we like the positive impact that WestProp brings to local capital markets.
The IPO is the first of its kind on VFEX and adds variety to investors interested in real since vis-a-viz the delisting of ZPI in 2020 and Dawn Properties in 2021.
However, for an equity IPO, it is quite interesting that WestProp’spreference shareholders will likely come out with better value for moneycompared to ordinary shareholders, deliberate or not.
Mtutu is a research analyst at Morgan & Co. — [email protected] or +263 774 795 854.