Invest with the Wapnicks
14/12/2005 00:00 AM
By: Vic de Klerk 
 
LAST WEEK, Fredswem Investments ? a company in which Sharon and Jeffrey Wapnick each has a one-third interest ? bought 110 000 Octodec shares at 850c each on the JSE. More than three years ago, on 22 August 2002, Alex Wapnick bought 60 000 shares in Octodec at 250c each. Between those dates, the Wapnicks also bought Octodec shares on 50 other occasions.
The father, Alex Wapnick, is executive chairman of Octodec and its larger counterpart, Premium Properties, in which the family also bought shares just as regularly over the past year. Wapnick's son Jeffrey is MD of the two companies, and his daughter Sharon a non-executive director.

The Wapnicks are known and respected in the property business in Pretoria. They were probably the first developers who converted old offices in the Pretoria CBD into residential units on a large scale. But they have two further distinctions. The share prices of Premium and Octodec have fared significantly better than the average for the PLS sector over the past four years. In fact, in terms of returns, it looks as if Premium and Octodec are first and second respectively.

A second major distinction is that neither of the two companies maintains the luxury of a fat share option scheme for its executive directors. If the directors want to benefit from their good work and the increase in the share price, they buy shares in the two companies on the JSE, just like any other investor.

Over the past four years they've done so very regularly and have made millions from it. However, no shareholder objects to that, as it's been conducted on a level playing field and not to the detriment of other shareholders. It's a pity that other companies, where compensation from share schemes sometimes amounts to R50m/year for a single director, don't take a page from their book.

But let's get back to Octodec and why the directors still buy its shares. The company specialises in shopping centres from Pretoria right through to Johannesburg. Rental income from these centres makes up 64% of the group's total income. Industrial parks, especially in the Silverton area, also represent an important share of the group's assets.

According to the latest balance sheet, the company has a net asset value of 825c/share. The total dividend and interest payment per linked unit for the year to 31 August was 67,7c, or 12,8% higher than in the previous year. At the current price of 850c, that gives an interest income of 8%.

Octodec uses 35% of borrowed capital, which therefore means a reasonable gearing benefit for its shareholders. SA's continued low interest rates and the possibility of a decline next year mean that it remains an interesting investment but not something to become ecstatically excited about.

The Wapnicks clearly see something else, such as the vacancy rate at end-August, which at that stage was 22% of the group's gross lettable area of 325 793 sq m. That's abnormally high. The company says it's largely caused by recently buying property in Johannesburg's CBD and other new developments. With both those factors left out of the equation, the vacancy rate would still be a high 13,3%.

In SA's current favourable economic conditions, property doesn't remain vacant for long. The 22% vacancy rate at end-August is unusual. It could easily fall to below 10% in the coming year. In fact, if we look at the vacancy rate in other listed property companies, it shouldn't be much more than 5%.

Something's cooking at Octodec. Along with continued low interest rates and a vacancy rate that could fall significantly, it's just possible that the total distributable income for the following year could rise by 15% to 20%, to as much as 80c/share. That puts the share on a future interest income of 9,5% ? the kind of return that's no longer easily achieved in the property industry.

In fact, if a retail property currently offers a return of 9,5% plus growth of 10%/year, developers are only too keen to tackle it ? even with borrowed money. Perhaps it's easier simply to go out and buy Octodec shares.