Gaynor on Wednesday: Valuation puzzle for investors

By BRIAN GAYNOR

Trans Tasman Properties

Are most property valuations hopelessly inaccurate and inflated? Certainly that is the only conclusion one can draw from Trans Tasman Properties' appraisal report.

Property specialists Colliers Jardine and Jones Lang Lasalle value the group at 70c a share, but Grant Samuel concludes it is worth only 30c to 40c a share.

Even the non-cynical investor will find it difficult to reconcile these two figures.

Trans Tasman's directors have endorsed the higher figure in the recently released annual report, yet two independent directors now accept the lower valuation.

At issue is the proposed capital reconstruction of Trans Tasman under which:

* Convertible noteholders will receive one $1 2007 bond for every $1 convertible note.

* Minority shareholders will receive 35 $1 2011 bonds for every 100 ordinary shares.

Sea Holdings, which owns 54.8 per cent of the ordinary shares, will not participate in the offer.

The recapitalisation has a number of clear advantages to Sea Holdings. These include:

* It will obtain 100 per cent control of Trans Tasman without any additional outlay.

* The group's net asset backing per ordinary share will rise from 70c to 102c.

* Trans Tasman can pay a dividend whereas under the convertible notes trust deed a payment cannot be made because of continuing property devaluations.

* Sea will receive all the upside of any improvement in the property market.

The proposed transaction also has a number of advantages for convertible noteholders including:

* The bonds will be redeemed for cash, whereas Trans Tasman can convert the existing notes into ordinary shares on a 1:1 basis.

* The new bonds will pay 10 per cent a year on a quarterly basis, whereas the notes pay 9.5 per cent every six months.

* The existing notes are unsecured, whereas the 2007 bonds are secured by a first ranking floating charge over Trans Tasman's assets and rank ahead of the 2011 bonds issued to ordinary shareholders.

On this basis the recapitalisation is attractive to convertible noteholders.

The decision facing ordinary shareholders is far more difficult because property experts claim Trans Tasman is worth 70c a share, whereas Grant Samuel - which has limited property experience - values the group at 30c to 40c a share.

Grant Samuel argues that the property experts have been far too optimistic because their rental growth projections are too high, no allowance has been made for Trans Tasman's overhead costs and capital expenditure and tenant inducement payments have been underestimated.

As the PricewaterhouseCoopers recent appraisal report on Kiwi Development Trust also argued that the valuations of CB Richard Ellis and TelferYoung were too high, can we now conclude that all property valuation experts are too optimistic?

Are property values inflated to ensure directors can present a more optimistic picture to bankers?

Are assets overvalued to boost the fees paid to management companies?

Unfortunately, Grant Samuel's assessment of Trans Tasman seems to be far more realistic than the figures produced by Colliers Jardine and Jones Lang Lasalle, and endorsed by directors in the annual report.

Shareholders now have to weigh up the different valuations. They also have to consider whether a 10-year bond, paying 10 per cent a year, is more attractive than an equity position that will stop Sea from gaining full control without additional expenditure and give investors the full protection of Stock Exchange listing rules.

The best outcome might be for convertible noteholders to accept the proposal, but for ordinary shareholders to take a longer-term view and reject it.

* bgaynor@xtra.co.nz