Prosperity Minerals: Making a seamless transition from cement to property development

It has been a year of great change for Prosperity Minerals (LON:PMHL) as it has offloaded the bulk of its cement operations to concentrate on iron ore and making a push into the Chinese real estate sector.

The transition has been a positive boon for long-standing investors in the company, which is now paying an enhanced dividend and has launched a modest stock repurchase programme. 

Hardly surprising then that the shares have advanced 140 per cent in the past 12 months. 

Underpinning the company’s current valuation is the £315 million it made from selling the rump of its Chinese cement business to local rival TCC International in April.

Richard Nolan, analyst at the company’s broker and Nomad Daniel Stewart, calculates there is around £200 million of this sum left after the company invested in land and property assets in the People’s Republic (more of this later).

The current share price of 129p values Prosperity at just shy of £180 million, or at a 10 per cent discount to the company’s cash value.

So no account has been taken of the firm’s other assets such as an iron ore business that shipped a record 7.9 million tonnes last year, a rise of 80 per cent on the amount it handled 12 months earlier.

Segmental profits of the business were US$10.3 million, down US$4.4 million because of the falling price of the ore. However it was still a major contributor to Prosperity’s bottom line.

Neither does the current share price reflect the full market worth of the firm’s remaining 33 per cent stake in the Anhui Chaodong cement business, or a portfolio of properties in Guangzhou, China.

The latter was acquired in the summer when Prosperity snapped up local firm Bliss Hero for £70 million from Cheong Sing Merchandise Agency and Splendid City. 

Bliss owns interests in SilverBay Plaza and the Donfang Wende Plaza developments, which an independent report from the property consultants Lang LaSalle Sallmans valued at £177 million.

It has also sunk around £20 million into two high-end property projects in Fujian Province.

The company, led by Hong Kong tycoon and co-founder Wong Ben-koon, is moving into the market at a difficult time with the People’s Republic introducing a new property tax and restrictions on mortgages. 

However Prosperity seemed unperturbed by the changes as it outlined its property strategy in June.

“[Our real estate deals] will provide the group with an immediate initial portfolio of property assets which will offer a blend of rental income, profit and capital appreciation through development and resale,” it told investors. 

“Prosperity is entering a new phase in its development as a company."

According to the company, China’s long term urbanisation plan will bring with increased demand for high-quality housing in the major cities. 

The shares are trading to this discount its cash value because the market is worried about the “execution risks” associated with this radical change of strategy, which will see the company focus on property.

However as Daniel Stewart analyst Nolan points out, Prosperity hasn’t missed a beat so far.

In fact there have been a few positive surprises, not least the decision to hike the payout quite substantially to 9 cents a share from just 1.7 cents, giving a very respectable dividend yield of almost 5 per cent.

“While we acknowledge that there are difficulties in the Chinese real estate market, it is equally important to acknowledge that it is not a homogenous market,” said analyst Nolan in a note to clients following the Bliss Hero asset acquisition. 

“As Prosperity’s transformation proceeds and they continue to execute and deliver on their new business model we would expect the share price to more accurately reflect the value of its assets. 

“The discount the market has been applying to the shares, in the very least to its cash holdings, looks less and less justifiable following this announcement.”

Daniel Stewart rates the shares a 'buy' with a price target of 190p.