Russian Real Estate Developers Stocks – AFI Development and LSR Group
A few months ago, I looked at Chinese real estate developers, a sector that looks cheap because small cap stocks have a price earnings ratios between 2 and 5, medium cap between 4 and 7, while the largest developers have a PE ratio between 5 and 10. You would say Chinese developers are extremely cheap, but so is the whole industry. US real estate developer, Tol Brothers (NYSE: TOL) has a PE ratio of 7.14. Therefore, you will not be surprised when I tell you that real estate developers in Russia have PE ratios from 2 to 4.
Let’s take a look at their business models to see whether the risks justify the valuations.
AFI Development stock analysis
If you look at book value, it all looks extremely valuable with a net book value of $822 million on a market cap of $222 million. Total debt is $532 million while total assets are $1.5 billion. The bulk of the loans is for the AFI mall.
Without those gains, that might be there or not, because you only know what is the value when you sell something, profits would be $30 million for the first 9 months of 2018. Further, the market isn’t hot at all in Russia anymore as mortgage rates have started to go up again.
As oil prices decline, you can expect even slower investments, the mortgage system isn’t really developed in Russia and therefore the cheapness.
AFI’s rental income is $100 million approximately per year, finance costs $40 million and you get gross profit of $60 million that covers other costs. As nobody knows what will happen to the inventory as demand slows down, it is hard to estimate the value of the stock here.
It is all about the management’s intentions, there is not dividend in sight, you never know whether they are going to build more even if there is a slowdown, also mall revenues are going to fall, and that is actually a tough and highly competitive business in Eastern Europe as malls are being built all over the place.
The Group expects more than 770k square meters to be completed in Q4 2018.
These guys are actually going for an acquisition in the current market to replenish the company’s inventory after great 2018 sales. Plus, one-off factors impact materially net income, they have been issuing debt to pay a dividend in 2017, 2018 was better the opposite but still a lot of questionable things.
If you take a look at the operating cash flows of Tol Brothers over the last 10 years you see those are extremely negative in a downturn and extremely positive in an upcycle.
I don’t like these leveraged plays even if there seems to be value. It might be good, it might be bad, it is simply that it depends on so much that nobody can know; interest rates, commodity prices and what happens to the economy economy. Some will do very good, some will go bust, that is the nature of the business. As always, I don’t have to be invested in everything and although interesting, I am not going to become a specialist in real estate developers for now as here or there they usually go bust, think about Trump.
Let’s find businesses where the probability of going bust or not growing is minimal no matter what happens. Please subscribe to my newsletter to get a by-weekly overview of the content produced, both on YouTube and on this blog.
A final note – why is the above research so important if I am not going to buy this? Well, investing knowledge compounds, and this is probably the best lesson I’ve learned since becoming a full-time stock market researcher in 2018. I might not invest now in this, but in 2027, there might be something connected to this that will give me a good connecting point to something else or this. Therefore, investment is a game of learning, as would Jonathan Seagull say: my race to learn has just begun.