Moreover, this means that with the shares trading on a bid-offer spread of 4,780p to 4,845p, the discount to book value is still quite considerable at 29 per cent. It also means that my target price of 5,800p is certainly achievable on valuation grounds. From a technical perspective, my target is just below a major price level dating back to March 2007.
To recap, I first advised buying Daejan’s shares at 3,300p in mid-February 2013 ('Buy the breakout', 14 February 2013). Paper gains aside, if you followed the advice you will have banked dividends of 89p a share and can look forward to a final payout of 47p a share in November (ex-dividend date of 15 October). Based on a raised full-year payout of 82p a share, the current yield is 1.7 per cent. It’s very secure since Daejan’s annual rental income of £112m covers the cash cost of the dividend nine times over. It’s progressive too since the board have lifted the payout by half in the past 11 years.
Valuation uplifts underpin share price
And it's not as if the share price discount is warranted by a sub-par investment performance. In the latest financial year, Daejan increased pre-tax profits by 50 per cent to £165m including an eye-catching net valuation gain of £120m on its £1.55bn investment portfolio.
That mainly reflects the fact that four fifths of the company's UK portfolio is located in the prosperous areas of London and south east England. These investments are split between offices (over a fifth of the UK portfolio); retail (a quarter of the portfolio); and residential assets, accounting for more than 40 per cent of the book.
If exposure to the buoyant London residential and office market wasn't compelling enough, Daejan also owns a US portfolio worth in excess of £300m, of which 85 per cent is residential property. Assets here are located in New York, Boston and Florida. In other words, the company has exposure to some of the best performing real estate in the past year.
The company's annual report and accounts will be released shortly ahead of the annual meeting on Thursday, 11 September 2014, so it will be interesting to see how much of the £120m valuation uplift was driven by the rampant London housing market. Commercial property in the capital should have contributed too since Daejan's prime commercial assets include the redevelopment of the Grade II-listed Africa House in the Aldwich, London. The property offers 118,000 sq ft of prime London West End space.
Conservative accounting policy
It's also worth considering that Daejan runs a very conservative balance sheet. Gross borrowings of £291m at the end of March 2014 equate to less than 20 per cent of the value of the company's £1.55bn investment portfolio. Net of cash of £59m on the balance sheet, the statutory gearing ratio is only 21 per cent of shareholder funds of £1.11bn. This is reassuring as I try and avoid property companies with highly geared balance sheets for the simple reason that although the combination of financial gearing and rising property prices can lead to significant net asset value gains when property values are rising, book value can be decimated when valuations decline due to the gearing effect going into reverse.
It is also clear that last year's property gains are not one-offs. By my reckoning, valuation gains, development profits and retained earnings have contributed to a £420m increase in shareholder's funds in the past five years alone. Furthermore, rental income has risen from £96m to £112m in the same period which means that the annual interest bill is covered 10 times over.
Weighing up the negatives against the positives
Admittedly disclosure of information is scant. The results statements are brief by any stretch of the imagination and though the annual report and accounts are far more informative, the lack of publicly available information is clearly a negative for outside investors. It doesn't help matters that the FTSE 250 company's board has a disinclination to talk to the press. This partly explains why the shares trade on a discount to book value.
Liquidity is also an issue. That’s because the founding Freshwater family control well over 70 per cent of the share capital through direct interests, beneficial holdings and shares held in trust, albeit the shares are readily tradable and the bid-offer spread is tight enough despite the large family holding reducing the free float.
That said, these factors do not justify valuing the shares at a 29 per cent discount to book value. A far more reasonable discount would be closer to 15 per cent, in my opinion. In the circumstances, I believe my target price of 5,800p is a sensible objective and with 20 per cent further upside on the table, I rate Daejan shares a buy on a six-month basis.
■ 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'
