That said, and as has been the case for the past four years of this roller coaster bull-run, I am inclined to use any spike in risk aversion as yet another opportunity to buy quality shares at attractive prices with a view for medium-term gains. That’s why it always pays to maintain a watchlist of well researched companies so that you can take advantage of any such price moves.
Another point worth noting right now is that companies with a good news story to tell are not getting the requisite re-ratings they deserve, a fact that some boards have clearly noticed. For example, shares in London-listed property developer and closed-end investment fund Macau Property Opportunities (MPO: 258p) are only modestly up on my last buy recommendation at 242p (‘Far Eastern promise, 19 May 2014), even though the company is set to release a robust set of full-year results on 18 September.
To recap, I initiated coverage less than a year ago when the price was 177p ('Far eastern delight', 6 Sep 2013), since when the company paid out a 21.1p a share capital distribution to shareholders at the end of April. If you followed that advice you are sitting on a total return of 55 per cent in just over 10 months, but now is certainly not the time to bank profits as a move to my 290p target price looks very achievable. If anything I would be averaging up.
Hot property
Launched in 2006, the company targets strategic property investment and development opportunities in Macau - the Chinese gaming industry equivalent of Las Vegas - and Mainland China's western Pearl River Delta. Its portfolio mainly comprises a mix of well-positioned residential, retail and logistics property assets - areas of the market that have been doing exceedingly well. In fact, full-year results in March revealed underlying net asset value per share surged by a quarter to $4.95, or 288p at current exchange rates. It was déjà vu when Macau Property released its first quarter results a few months ago: the company's net asset value surged by almost 6 per cent to $5.25, or 305p a share at current exchange rates.
Furthermore, with the property boom in Macau rampant, it's only reasonable to expect further valuation gains and substantial increases in Macau Property's net asset value when it reports on 18 September. Analysts at Liberum predict book value per share will have risen to 316p at the end of June and are pencilling in a figure of 336p at the end of December. On that basis, the shares are rated on an unwarranted 23 per cent discount to prospective year-end book value.
And as I alluded to at the start of this article, the board of Macau Property have taken note. Indeed, ahead of entering a close period, they have just appointed broking house Liberum Capital to manage a share buy-back programme on behalf of the company. The brokerage has the authority, pursuant of shareholder approval at last November’s annual meeting, to purchase up to 7.6 per cent of the issued share capital. It makes sense too as any purchases will enhance net asset value per share on the outstanding 81.4m shares in issue. In turn, this can only underpin Macau Property's share price and deliver further increases in book value per share.
The board have history here too. At the end of January, around 760,000 shares were bought back at an average price of 206.1p. And in May, the company bought back 1.6 per cent of the share capital (1.325m shares) at 235p a share. But investors have failed to notice this latest announcement which offers us a great opportunity to buy the shares in advance of the results.
That’s because we are not only guaranteed a bumper set of results in eight weeks time, but if there is any short-term market weakness between now and 18 September, rest assured Liberum will step into the market to hoover up any shares going on the cheap. In effect, this acts as a solid back stop to the share price. In the announcement, Macau Property’s board also noted: “Due to the limited liquidity in the shares, a buy-back pursuant to the programme on any trading day is likely to represent a significant proportion of the daily trading volume in the shares on the Exchange (and is likely to materially exceed the 25 per cent and 50 per cent limits of the average daily trading volume of June 2014).” In other words, the company is committed to a major buy-back programme and one that will underpin the share price.
It’s worth noting too that Macau Property had free cash of $68m at the end of March, so the company has ample funds to finance its operations and facilitate further property purchases while still being able to redeploy some cash to make opportunistic share buybacks.
Favourable back drop
Importantly, the market backdrop for Macau property is favourable. Current guidance is for house prices to rise between 10 per cent and 20 per cent in Macau this year. Agents forecast that price growth for upmarket homes in the city, in particular incomplete flats, could far outpace that of homes for the mass market. Upmarket homes refer to those priced above HK$20m (£1.2m), or costing over HK$13,000 per sq ft. Prices are expected to hold firm in the face of tight supply, particularly given strong local demand and the influx of foreign workers.
If the local agents are correct, then this is yet more good news for Macau Property's portfolio, the cornerstone of which is The Waterside, a 148,000 sq ft development of 59 luxury apartments, which accounts for half the value of the portfolio. Occupancy rates are around 90 per cent and average rental values continue to hit record levels. Liberum’s net asset value forecast for the quarter to end June 2014 is driven mainly by capital value growth at three of its developments: The Waterside, One Central apartment development and The Green House, a 5,200 sq ft luxury private home offering unobstructed, breathtaking views of Macau from atop Penha Hill.
The investment case is also underpinned by the robust economic growth forecast for Macau. Having expanded by 11.9 per cent in 2013, Economist Intelligence Unit predicts that Macau's GDP will increase at an annual rate of 10.6 per cent this year, the key driver of which is the gaming industry. Macau's accumulated gaming revenue in the first three months of 2014 hit $12.8bn, almost 20 per cent higher than a year ago, buoyed by the rising discretionary spending power of the growing Chinese middle class.
In the circumstances, I have no hesitation in repeating my previous buy recommendation and feel my year-end target price of 290p is achievable. Offering 12 per cent share price upside, Macau Property's shares are worth buying ahead of the forthcoming results on a bid offer spread of 254p to 258p.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
