Chagala 2018 Interims. Realty Invest Offer Closes 28 September.

Chagala’s interims announced on 18 September 2018 have followed hard on the heels of its delayed 2017 full year accounts published in July. Revenue, profit and asset value have all decreased, partly as a consequence of adverse currency movement. Increasing competition in Atyrau, the main area of operation of Chagala, is also apparent. However, the Offer of $2.15 per share from Realty Invest Holding LLP (“Realty Invest”) remains the focus of attention with the final day for acceptances being 28 September 2018 (shareholders with 63.6% have already accepted, 27.8% have irrevocably not accepted, leaving 8.6% to respond). No further dividends have been declared since the last one for USc2.5 per share in August.


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Chagala Unconditional Cash Offer from Realty Invest – irrevocables provide control

Chagala has received the expected unconditional cash offer (the “Offer”) from a SPV procured by TIPP Investments PCC (“TIPP”), as announced in June, following the prior offer by Asian Investment Management Services Limited (“AIMS”).

The SPV, Realty Invest Holding LLP (“Realty Invest”), already has irrevocable acceptances from TIPP, Chagala’s directors and those associated with them, which will provide Realty Invest with control.

Although the Offer price is a 39% discount to Chagala’s NAV per share as of the end of December it seems likely that any “independent” shareholders will accept the Offer.

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Chagala 2017 Year End Results and Forecasts

Following the start of commercial production at the Kashagan oil field, North Caspian Operating Company N.V. (“NCOC”), which was the Group’s largest client, has been cutting costs, which has had an effect on its occupancy of Chagala facilities, as seen in the 2017 figures.

The Group will undoubtedly continue to feel the decline in business from NCOC during 2018 as it impacts for a full year. Compensating for this, to an extent, is an increased level of business from the other major oil consortia, Tengizchevroil LLP and Karachaganak Petroleum Operating B.V. , some cost cutting in certain areas and a higher level of marketing for shorter stay business. Nevertheless, we see revenues falling by nearly $2.5m in 2018 before improvement feeds through from the better economic conditions within the country.

The major focus for investors’ attention remains the anticipated offer of $2.15 per share from a special purpose vehicle (“SPV”) to be procured by TIPP Investments PCC (“TIPP”). The SPV Offer will equate to a substantial discount of 38% to December 2017’s NAV of $3.48.

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Potential competing Cash Offer for Chagala

Following the AIMS Offer last week at US$1.55 per share, Chagala has received a potential competing bid indicated at US$2.15 per share, in cash which will be made by a special purpose vehicle (the “SPV”) to be procured by TIPP Investments PCC (“TIPP”). For the avoidance of doubt, the cash offer will not be made by TIPP.

The directors of Chagala have therefore recommended that shareholders do not accept the AIMS Offer and instead await the making of the SPV offer.

At US$2.15 per share, the TIPP offer is still significantly below our last estimated NAV for the Company of US$3.54 – approximately a discount of 40%; but significantly above the latest average traded value of US$ 1.25 – approximately 70% premium.

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Chagala Cash Offer by AIMS


Chagala has received an unconditional Cash Offer for its shares on 20 June 2016 from existing shareholder Asian Investment Management Services Limited. The offer price of US$1.55 is at a substantial discount to our previous estimated NAV of the Group of US$3.54. Outstanding litigation against the Group by a member of a concert party which attempted to gain board control two years ago seems to be at the heart of the Offer which may be designed as a way of ending the dispute. The Directors are making no recommendation to shareholders.

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Chagala Group: H1 2017 profits boosted by 2016 refinancing

Price: US$1.25

Market Capitalisation: £20m

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Chagala reported an 8% rise in interim pre-tax profits, on the back of lower interest costs following the debt refinancing last year and foreign exchange gains, as the local currency strengthened. Although EPS fell 8%, NAVPS was up 5% to US$3.75. Positive free cash flow reduced net debt further at the period end, so the net LTV was just 11%. As the company is on target to meet our 2017 forecasts, we have not revised our numbers. The stock remains on a wide discount to NAV and with a forecast dividend of USc2.5, the yield is 2%.

Results boosted by forex gains: Chagala reported an 8% increase in pre-tax profits to US$1.6m for the interim period. Profits were boosted by US$0.35m of foreign exchange gains and lower interest costs, following the stronger local currency and debt refinancing in 2016. A more than doubling of the tax charge depressed earnings, which fell 8% to US$1.2m and US$0.057 per share. NAV increased 5% to US$80m or US$3.75 per share, on the back of the retained earnings. Chagala paid a divided of USc2.5 in July, after the period end.

Stronger balance sheet: The balance sheet benefited from the refinancing at the end of last year, with total debt dropping below US$12m. The LTV also fell to just 14.5%. Operating cash flow was lower, but was still over US$3m in the first half, sufficient to cover investing and financing and increase the cash balance to nearly US$3m, before a US$0.5m dividend was paid.

Forecasts unchanged: We have not made any changes to our forecasts following the results. The interims leave the company ahead of our run rate for the year for cash flows and profits, so we feel more confident of Chagala meeting our numbers.

Valuations remain attractive: The stock is currently trading on a discount of 65% to NAV. With a FY18 yield of 3.8% this seems hard to reconcile, now that the  operational backdrop has stabilised and the short-term debt has been refinanced.




Chagala Group: Forecasts revised following 2016 results

Chagala Group (CGLO.L) Forecasts revised following 2016 results

Price: US$1.25

Market Cap: £20m

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Chagala reported a 10% increase in adjusted profits before tax in 2016, despite a 14% fall in turnover and the ongoing effects of local currency devaluation in 2015. Although EBITDA was 4% lower, operating profit increased 17% on lower depreciation and admin costs. We have revised our forecasts slightly for this year to reflect top line assumptions, but lower operating and interest costs. No dividend has yet been proposed for 2016, and the ongoing shareholder dispute may influence when or if a dividend will be declared. However, we are assuming a minimum 50% payout, in line with the company’s policy. The stock still trades on a significant discount to NAV, peers and our fair value.

Good results despite the impact of devaluation: Room and rent revenue fell 11%, due to the ongoing effects of Tenge devaluation. However, lower costs, with salaries down 24% and admin costs 12% lower, meant that EBITDA fell just 4%. Reported profits were reduced by US$1.3m of litigation costs.

Outlook has improved: Due to a more stable oil price and a gradual improvement in the local currency over the past year, the operating outlook has improved. Occupancy is still high and new sites were delivered last year at two locations.

Earnings forecasts revised lower: We are expecting slightly lower revenues in FY17, with a 1% fall now pencilled in. We also forecast EBITDA to be unchanged. With lower debt costs, we expect adjusted PBT to more than double. We thus expect the NAV to start to recover this year on the improving profitability.

The valuation discount is unchanged: NAVPS was flat last year, despite the weaker earnings, but we expect a recovery next year. The stock currently trades on a 64% discount to our 2017 NAV forecast and just 4.5x EBITDA. Recurring free cash flow is forecast to be c.US$4m a year (a yield of c.12.5%), which would easily support a potential dividend payout of up to c.US$1m.


Chagala Group (CGLO.L): Share placing appears crucial for bond refinancing

Chagala Group (CGLO.L)Share placing appears crucial for bond refinancing

Price: US$1.25

Market cap: £20m

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  • Placing to raise US$5.75m: On 6th September Chagala announced a placing and open offer to raise gross proceeds of US$5.75m (US$5.5m net) at a price of US$1.00, a 50% discount to the closing price before the announcement. The funds will be used to finance the repayment of the group’s outstanding bonds and strengthen the balance sheet. The placing and offer close on 23rd September. 


  • Bonds due to be repaid in December: Chagala has outstanding KZT denominated bonds totalling US$6.6m, which are due to be repaid on 1st December 2016. In fact, the group will need to show that it has the funds available to repay the bonds by 15th October, to avoid being in default. However, the ongoing shareholder dispute has severely limited the group’s refinancing options, given the timetable of most banks’ credit approval process; hence the need for the placing and offer.


  • Potential loss of revenue: Additionally, the majority of Chagala’s rental contracts and accommodation agreements require the group to be financially solvent to avoid defaulting on its leases as well. As a result, if the placing and offer do not proceed it is likely that the group would also suffer a significant fall in ongoing revenue, on top of the negative cash impact of the bond refinancing and become effectively insolvent.


  • Injunction filed by TIPP Investments: Chagala announced on 19th September that TIPP Investments has filed an application for an injunction in the High Court of the British Virgin Islands, to suspend the placing and offer until 27th This is the date of a hearing filed by TIPP, against the company and its board. TIPP claims the placing and open offer “would prejudice TIPP’s rights as a shareholder”. This is being contested by Chagala in a hearing likely to take place on 22nd September, the day before the placing and offer close.


  • Stronger balance sheet and higher dividends post placing: However, if the group is able to proceed with the proposed placing and open offer it will have the cash proceeds to be able to repay the bonds on maturity, thereby avoiding default on the leases as well. With a significantly strengthened balance sheet it would also be able to increase the dividend payout. We are currently assuming that total dividends remain flat at US$1.2m in 2017-18, but with free cash flow of US$3m forecast for this year and £5m in 2017, even without the bonds being refinanced, we would expect to see a significant increase in the payout.


  • Dividend yield could rise sharply: The shares have barely traded in the past few months, partly due to the current lack of free float and partly the ongoing shareholder dispute. However, if the fundraise were successful and the dividend payout were increased, the yield could potentially double from the current level of c.5%. However, in the absence of the placing and open offer, it is difficult to see how the group would be able to refinance its bonds and remain a going concern.

Chagala: Concert party overshadows good results

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Chagala reported a 17% increase in 2015 adjusted profits, despite a 16% fall in turnover and a severe devaluation in the local currency. Adjusted PBT increased 17% on lower depreciation and interest costs. We have revised our forecasts to reflect the weaker currency and lower cost environment. The stock still trades on a wide discount to NAV and yields 4.4%. Before the AGM Chagala announced it had removed voting rights from shareholders appearing to act as a concert party in connection with 15% of Chagala’s shares acquired at an 80% premium.

Good results despite devaluation: Room and rent revenue fell 15%, due mainly to the effect of Tenge devaluation. Cost control, with salaries down 14% and admin costs 11% lower and the currency effect meant that EBITDA was just 12% lower. Reported profits were boosted by a US$2.4m impairment reversal.

Earnings forecasts revised up: With a higher oil price and an improvement in the local currency since year-end the operating outlook has actually improved. Occupancy is still high and new sites have been delivered in Atyrau and Uralsk. We now forecast EBITDA to be 2% higher. Following debt repayment, we expect adjusted PBT and EPS to increase 80% and for NAV to start to recover this year.

Concert party announcement: On 10th June Chagala’s board served direction notices on shareholders representing c.40% of the total stock, which it determined was acting as a concert party in acquiring shares. This prevented them voting at the AGM and postpones them receiving distributions. The restrictions will remain unless the group makes an offer for all remaining shares, which seems unlikely.

Valuation discount remains: Although NAVPS fell 24%, due to the currency weakness, the stock is trading on a 65% discount to our 2016 NAV forecast. It now yields over 4% and is valued at 4.8x EBITDA. Recurring free cash flow of c.US$5m is forecast in 2017, which should support the intention to raise the dividend payout.



Lok’nStore (LOK.L) More of the same in 1H16

Price: 317p, Market cap: £80m

Adjusted profits increase 23%

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LOK reported a strong set of interims, leaving management feeling very upbeat about the outlook. Adjusted operating profit was 17% higher at £2.4m, on the back of a 5% (8% like for like) increase in turnover to £8m. Adjusted EBITDA was up 13% and FFO, management’s favoured measure of cash profits, improved 23% to £3.1m. Adjusted NAV was 14% higher at 307p and the dividend was raised 15% to 2.67p per share.

Operations continue to grow:

Occupancy was up 2.4% year on year on a like for like basis, although unadjusted it was flat. Pricing was up 3.3% YoY and store margins improved nearly two percentage points. The headline operating figures looked good, but were boosted by management fees and pure self-storage revenue was up just 1.4%, following the sale of Swindon in September 2015.

 Pipeline of four assets:

Following the opening of Bristol, Southampton and Chichester in the past few months, management said there were a further four sites in the pipeline. Two of them will be managed stores. The £10m cost of building the other two freehold stores will be funded internally.

 Balance sheet strengthened:

With net debt of just £26m and an LTV falling to 26% the group has capacity to gear up to fund its expansion plans. Cash at the interim stage was £3m, but there is another £3m to come in during the 2H of FY16. The improved terms on the new banking facility should also produce a cash saving from the 2H.

Shares have recovered:

The shares saw a justified bounce after the release, after a prolonged period of weakness since January. With the stock trading on 2% discount to NAV and yielding nearly 3%, we would argue there remains further upside. Our valuation range for this year is 336p-361p.





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