Bargain shares updates

It's an absolutely master coup by the government as all bar 2 per cent of homebuyers will now be better off under the new system, while scoring political points ahead of May's general election by increasing the tax take on the most expensive properties but without introducing a mansion tax. In fact, only buyers paying over £937,000 for their home will be worse off. The stamp duty savings will clearly encourage purchases in the £200,000 to £400,000 range, a price bracket the majority of the FTSE 350 housebuilders sell into. The stamp duty changes are very positive for the buy-to-let market too, by reducing transaction costs and encouraging investment for the majority of landlords. In the circumstances, it's hardly surprising that shares have reacted positively and ahead of the seasonal first quarter upswing, I remain a buyer of the sector.

Table FTSE 350 Housebuilders' performance table (25 November 2014 to date)

I also noted last week's upbeat trading statement from Inland (INL:59p), the small cap homebuilder and brownfield land developer. In the first half to end December 204, the company has so far completed on 161 homes which is more than the 114 units sold for the whole of the last financial year and almost 60 per cent of the 270 forecast for the current fiscal year. Housing revenue of £38.4m equates to a blended average per unit of £233,000, but looking through the impact of bulk sales, underlying prices achieved topped the £270,000 estimate from analyst Duncan Hall at broking house finnCap. Moreover, second half reservations total £30.4m to date, implying that the 270 sales forecast is more or less in the bag.

The pipeline of land deals is equally robust: Inland currently has planning applications submitted for 545 residential units and 7,700 sq ft of commercial space across four sites. In the past six months, planning consents or resolutions to grant planning permission have been received on five sites for 393 residential units and 205,000 sq ft of commercial space. In addition, the company has made representations on seven strategic sites for the delivery of up to 1,500 residential homes and made pre-application submissions on six sites for 892 residential homes. Factoring in the recent land deal with Southampton City Council, details of which I outlined five weeks ago ('New highs beckon', 4 November 2014), this means that the company's land bank is now in excess of 4,000 plots, up from a record 3,700 plots at the time of the full-year results at the end of September.

Mr Hall notes that his target price of 70p is "substantially underpinned and looking conservative if current progress sustained." I would agree. Analyst Nick Spoliar of broker WH Ireland has sum-of-the-parts valuation of 100p a share and raised his target price from 70p to 80p post the trading update. Trading on 12.5 times finnCap's EPS estimate of 4.7p for the June 2015 financial year-end, falling to less than 11 times EPS forecasts of 5.5p for the year after, the shares are not highly rated either given the potential for valuation creation in the land bank. In fact, mark land holdings to market value and the price-to-book value ratio is modest. A 1.5 per cent prospective dividend yield adds to the attraction.

Needless to say, offering 18 per cent share price upside to my 70p target price, and with conditions in the housing market favourable, I continue to rate the shares a strong buy. Please note that I included Inland as one of my 2013 Bargain shares at 23.5p ('How the 2013 Bargain shares fared, 7 February 2014).

Fortune undervalued

Gains from the housebuilders have proved one of the few positives for my Bargain share portfolio this year, but this has not been enough to compensate for the losers, of which Fortune Oil (FTO: 7p) is one. The company supplies crude oil, transportation fuels and natural gas in China and has its headquarters in Hong Kong.

The main attraction for me when I advised buying the shares was the company's investment in Hong Kong-listed China Gas Holdings (HK:384). Fortune owns 197m shares outright and has a beneficial interest in 744m shares through a joint venture, China Gas Group Limited. Combined, this means that Fortune Oil has an interest in 941m shares, or 18.8 per cent of China Gas Holdings equity.

China Gas Holdings currently has a market value of HK$65bn, or £5.4bn at current exchange rates, based on 5.02bn shares in issue and a stock price of HK$13.04. This means that Fortune's direct investment in the company is worth £209m, and the company's 50 per cent share of China Gas Group's holding is worth a further £391m. Combined that is worth £600m or more than three times Fortune's own market value of £180m. The book value of the investment in China Gas Holdings is £402m in Fortune Oil's latest accounts, or a third less than its current open market value.

Despite Fortune Oil's own lacklustre share price, the investment in China Gas Holdings has clearly done well, rising from HK$11 per share in February when I advised buying Fortune Oil's shares in my 2014 Bargain share portfolio, to HK$13 now. This performance is justified too as China Gas Holdings recently reported a 49 per cent rise in revenues to HK$15.6bn (£1.2bn) and a 31 per cent rise in net profits to £150m. In the six months to end September 2014, China Gas Holdings sold 4.1bn cubic metres of gas, up 16 per cent on the same period in 2013, of which a third was sold to its 10m residential customers and the balance to its commercial and industrial customers.

Negative sentiment

True, shares in China Gas Holdings have fallen from a high of HK$16 at the end of June, reflecting the slowdown in the Chinese property market which will impact connection rates; the government's decision to raise natural gas prices by 20 per cent three months ago to bring them in line with international prices - this has potential to impact demand; and the slowdown in China's economic growth is impacting energy consumption.

Still, with Fortune Oil being valued at only 30 per cent of the value of its holdings in China Gas Holdings, the company's share price has more than priced in these three negative factors. In fact, at 7p, Fortune Oil's shares are now priced on half of reported book value of 13.8p, and that figure completely ignores the 8p a share of hidden value representing the difference between the book value and open market value of its interests in China Gas Holdings.

Moreover, Fortune Oil's Bluesky Aviation business remains very profitable and reported a 12 per cent rise in net profits to £6.3m in the six month period. True, the sharp fall in crude oil prices is likely to have impacted the value of aviation fuel held in storage - the business needs to have a two week inventory at any one time - but Bluesky has been taking measures to mitigate this, albeit it is unable to hedge all of the risk.

Sentiment has not been helped either by Fortune Oil's own half-year results which proved a nightmare to unravel. That's because a number of factors led to one-off gains in the same period in 2013, while a change in accounting treatment on its investment holdings made it difficult to get a handle on the underlying performance. But as I have noted, both China Gas Holdings and Bluesky have performed well which is what counts most as these two investments represent the vast majority of Fortune Oil's business.

In the circumstances, and despite the fact Fortune Oil shares have fallen from my recommended buy in price of 9p in this year's Bargain shares portfolio - having traded as high as 14.5p at one point - I am not bailing out. Sentiment may be unduly negative, but there is significant value on offer here and I would continue to hold the shares if you followed my earlier advice.

Please note that I will be on holiday for part of this week and my next column is scheduled for Monday 15 December.

■ Subject to availability and for a limited period only, Simon Thompson's book Stock Picking for Profit is available to purchase at a special discounted price of £10.99, plus £2.75 postage and packaging, for all internet orders placed at www.ypdbooks.com. The book is priced at £14.99, plus £2.75 postage and packaging, for all telephone orders placed with YPDBooks (01904 431 213). Simon has published an article outlining the content: 'Secrets to successful stockpicking'