Stock over-sold on Fincorp concerns
2nd April, 2007
The following research document was issued by Patersons Stockbrokers Monday 2nd April 2007:
City Pacific (CIY) $4.14 Recommendation: BUY
Analyst: Mark Topy / Tel: 03 8803 0117
Event - Market concerns regarding Mortgage Funds and impact on CIY
- Fincorp collapse has again raised issues regarding property developers raising funds direct from public, in a re-run of the types of issues seen with Westpoint.
- Fincorp was a property developer, which raised funds directly from the public to fund a number of its own property development projects. The company hit a credit crunch (amongst other issues) associated with borrowing short / lending long, and did not have have support to continue. Its developments were highly speculative and its management as described by KordaMentha was 'poor'.
- There was also a lack of properly registered security over a number of its properties, highlighting the poor management and risky approach.
Impact
- We do not see any similarities to Fincorp and CIY in their conduct of business.
- CIY has a $1bn plus mortgage fund with a 10 year history of no credit loss, and only CIY exposure is to Martha Cove (around 15%).
- All loans are secured by 1st mortgage and 80% of the book turns over in 12 months. The portfolio is extensively diversified.
- CIY's funds is also independently reviewed by PIR Research, to explain in detail the Fund operation. The Mortgage Fund is rated Four Stars, and CIY also takes other measures to enable external scrutiny.
- CIY deals with an established group of property developers with experience, who have equity and other sources of funds to repay loans.
- CIY has implemented a range of risk control measures, which underpins the operation of the Mortgage Fund.
- Company comment from CEO is that they are on-track in meeting forecasts, and timing issues delaying contract settlements at Martha Cove have been resolved.
- Negotiations as indicated at 1/2 year on Martha Cove with developers are continuing and expected to yield larger sales on the site.
- Negative publicity may slow inflow into the Mortgage Funds as an investor reaction in short term. This is until investors again differentiate between poorly run small, speculative operators with no financial or investor safeguards, and large funds with diversified portfolios and risk control management.
- CIY considerably strengthened its balance sheet post the $85m raising on 31st January.
- The BUY recommendation and $5.00 price target is maintained. Stock is over-sold on Fincorp concerns, notwithstanding a possible slowing in fund inflows into the Mortgage Fund.
Disclaimer: Disclaimer: Patersons Securities acted as Lead Manager to an institutional placement that raised $85 million at $4.65 per share in January 2007. Paterson Securities received fees for these services.
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