Ready For A Meltdown

A few months ago, my research for Champion Shares led me to London & Stamford (LSE: LSP) . I think this share is one of the most appealing opportunities in the commercial property sector right now.

London & Stamford joined AIM during November and raised £238m in order to be "well placed to capitalise on the correction that the [management] anticipate in the property market". Back then, the board claimed commercial property had reached an "unsustainable point" and did not support "initial yields below 5%" and "borrowing and margin costs of over 6.25%". Statistics from IPD, the property research firm, indicate commercial property prices have declined 7% since the float.

One attraction to London & Stamford is the simple accounts. There is no trading history to analyse and the balance sheet just consists of cash, debt and a few commercial properties dotted around the country.

Following the flotation and a subsequent disposal, I reckon the bank balance is about £259m (or 91p per share) while the flotation document reveals borrowings of £39m (13p) and property with a £55m valuation (19p). The net asset value is thus 97p per share, a fraction below the current 102p share price.

With pots of money to invest, London & Stamford's board is critical to this share and the flotation document reveals an encouraging management background. The three principal directors each have more than 30 years' experience in the industry and have twice sold out at market tops.

Their first investment firm was called Arlington, which they sold in 1989 for £278m after tripling shareholders' money during a three-year stock market stint. The managers then formed Pillar Property in 1991, when "the UK property market was in recession" and was "characterised by quality assets being offered cheaply by forced sellers". Pillar was sold in 2005 for £811m after achieving a 22% annual average return following its 1994 flotation.

The talented board does not come cheap, though. Although the key directors own shares with a £12m market value (about 4% of the group), they will also collect 1.75% of the group's net asset value as a basic annual fee. At present, that equates to about £5m and is not adjusted for un-invested cash. In addition, the bosses will enjoy a performance fee if net assets grow by 10% although this does ignore interest earned from the bank.

Overall, I think London & Stamford is a very interesting opportunity for investors that believe the commercial property market is heading for a meltdown. It's flush with cash and, most importantly, the group's bosses have proven experience of exploiting the sector's ups and downs.

That said, bear in mind the possibility that any "forced sellers" may take a few years to come out of the woodwork. Looking back at Pillar, the management's previous business, I see the share price never really got going until 1996, a year or two after the flotation and about six years after the previous property peak.  

Maynard writes Champion Shares, the Fool's share-tipping service. This 30-day free and no-obligation trial to the Champion Shares community gives you complete access to Maynard's favourite shares.