BDSec: INITIATING COVERAGE ON MONGOLIA GROWTH GROUP WITH A BUY RATING, WITH 1 YEAR PRICE TARGET OF $6.00
August 27 (BDSec) Mongolia Growth Group (MGG) (CNSX:YAK) is a Canadian domiciled corporation with all of its assets in Mongolia, invested primarily in the booming real estate market of Ulaanbaatar (UB). MGG also started Mandal General Daatgal, the country's best capitalized insurance company. We expect MGG to emerge as one of the dominant players in UB, with a sound investment strategy and a first mover advantage.
We see long term, rapid growth in both the value of the underlying assets, as well as rental yields, both of which are seeing increases of 35%-50%+ per annum. Despite beginning operations only sixteen months ago (Feb '11), management steered MGG to a $0.05 profit in FY'11, (on an IFRS basis) an exceedingly rare achievement for any startup.
Senior Management and board members own 33.5% of MGG, with founding management taking no salary or stock options.
Built for short and long term growth
- With rents and property prices increasing at such rapid rates, value to shareholders is accruing quickly. Vacancies have consistently remained very low at roughly 5%. We forecast a substantial increase in MGG's rental yield, as nearly half of their portfolio will be renewing their leases in the next 12 months at substantially higher rates.
- From a longer term perspective, MGG has acquired an outstanding redevelopment portfolio, strategically positioned on UB's main road, Peace Ave. In many cases, MGG subsequently acquired adjacent property, creating a much larger land package.
- Large parcels of land in prime locations are rare in UB and far exceed acquisition price. The opportunity for redeveloping these properties is immense, with the potential for creating value several times MGG's current stock price. For this reason, we will focus our valuation methodology with an emphasis on asset value vs. cash flow. We also expect MGG to list its equity in Mongolia soon, allowing locals the opportunity to invest in the company. We expect sustainable cash flow to lead to a dividend within a year.
Valuation
- While stated Book Value is $1.63/share, this number vastly undervalues the company's portfolio based on today's real estate prices. Upon an extensive review of MGG's properties here in UB and applying comparable sales, we estimate actual Book Value to be in the range of $2.50-$3.00/share currently. To be conservative, we assume property price appreciation in UB decelerates to 30% in the following 12 months, leaving us with a forward Book Value estimate of $3.25-$3.90.
- We apply a 1.7x to our forward midpoint estimate of actual Book Value of $3.60 to arrive at our target price of $6.00. As you can see in the following table, a Price/Book Value of 1.7x compares to a peer multiple average of 4.4x's. This peer sampling was made to incorporate other property developers in as many emerging markets as possible. Clearly, multiple expansion beyond 1.7x is reasonable, if not likely, given UB's superior growth characteristics vs. more mature emerging real estate markets.
- With rents increasing at 50%+ per annum and real estate prices appreciating at a rate of 3-5% per month, its conceivable MGG Equity could be worth $9.00-$10.00/share in 18-24 months, not including value to be created via redevelopment, or multiple expansion.
We see long term, rapid growth in both the value of the underlying assets, as well as rental yields, both of which are seeing increases of 35%-50%+ per annum. Despite beginning operations only sixteen months ago (Feb '11), management steered MGG to a $0.05 profit in FY'11, (on an IFRS basis) an exceedingly rare achievement for any startup.
Senior Management and board members own 33.5% of MGG, with founding management taking no salary or stock options.
Built for short and long term growth
- With rents and property prices increasing at such rapid rates, value to shareholders is accruing quickly. Vacancies have consistently remained very low at roughly 5%. We forecast a substantial increase in MGG's rental yield, as nearly half of their portfolio will be renewing their leases in the next 12 months at substantially higher rates.
- From a longer term perspective, MGG has acquired an outstanding redevelopment portfolio, strategically positioned on UB's main road, Peace Ave. In many cases, MGG subsequently acquired adjacent property, creating a much larger land package.
- Large parcels of land in prime locations are rare in UB and far exceed acquisition price. The opportunity for redeveloping these properties is immense, with the potential for creating value several times MGG's current stock price. For this reason, we will focus our valuation methodology with an emphasis on asset value vs. cash flow. We also expect MGG to list its equity in Mongolia soon, allowing locals the opportunity to invest in the company. We expect sustainable cash flow to lead to a dividend within a year.
Valuation
- While stated Book Value is $1.63/share, this number vastly undervalues the company's portfolio based on today's real estate prices. Upon an extensive review of MGG's properties here in UB and applying comparable sales, we estimate actual Book Value to be in the range of $2.50-$3.00/share currently. To be conservative, we assume property price appreciation in UB decelerates to 30% in the following 12 months, leaving us with a forward Book Value estimate of $3.25-$3.90.
- We apply a 1.7x to our forward midpoint estimate of actual Book Value of $3.60 to arrive at our target price of $6.00. As you can see in the following table, a Price/Book Value of 1.7x compares to a peer multiple average of 4.4x's. This peer sampling was made to incorporate other property developers in as many emerging markets as possible. Clearly, multiple expansion beyond 1.7x is reasonable, if not likely, given UB's superior growth characteristics vs. more mature emerging real estate markets.
- With rents increasing at 50%+ per annum and real estate prices appreciating at a rate of 3-5% per month, its conceivable MGG Equity could be worth $9.00-$10.00/share in 18-24 months, not including value to be created via redevelopment, or multiple expansion.
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