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OPINION

Buy the break-out

Buy the break-out
February 14, 2013
Buy the break-out

To put the level of undervaluation into perspective, with the company’s share price around 3300p, and only 16.3m shares in issue, this means that the investors are placing a modest £538m value on equity of £884m. Or put it another way, if the board ever wanted to divest some of this prime real estate, they could return cash accounting for all of the current share price and still have over 2000p a share of assets in the price for nothing.

A long history

The company offering all these attractions is FTSE 250 listed Daejan Holdings (DJAN: 3300p). It has a very unusual history which partly explains why the shares trade well below the value of those underlying assets. To understand why you have to wind the clock back over 70 years to 1939, when Mr Osias Freshwater arrived in the UK, via Danzig, on the last ship to leave the port before the outbreak of the Second World War on a business visa with the intention of procuring visas for his family. As Poland was invaded his wife and three children subsequently fled from Danzig to Lvov, but sadly perished in the holocaust. Settling in London's East End in 1947, Osias Freshwater married Nechama Stempel the widowed daughter of Rabbi Bobov who together with her two children had evaded the Nazis to survive the war. Ten years later, Osias Freshwater reversed his property interests into a shell company, Daejan, to create a London quoted property vehicle which by the 1960s and 1970s was regarded as the London's largest private landlord. The two sons of Osias and Nechama Freshwater are both directors of the present Daejan Holdings.

By my reckoning the Freshwater family control well over 70 per cent of the share capital through direct interests, beneficial holdings and shares held in trust. And it is this substantial family holding which mainly explains why the share price trades on a hefty discount to book value. It doesn’t help matters either that the board has a disinclination to talk to the press and the results statements are brief to say the least. That said, Daejan shares are easy to trade, so there is a decent market in them despite the large family holding. Moreover, priced on a bid offer spread of 3255p to 3300p, the company’s share price is now within touching distance of last April’s high of 3349p and last August's high of 3325p. Any break above the 3350p level would register a major buy signal in my view. I have a strong feeling that is going to happen, and in advance of a likely share price break-out, it’s well worth considering the investment case for this unusual company.

High quality portfolio

Daejan has held a London listing as a property company for 55 years during which time it has built up substantial commercial and residential property holdings worth just under £1bn in the UK and a further £260m in the US. In terms of the portfolio spilt, offices account for 20 per cent of the company’s book (£209m in the UK and £36m in the US at March 2012 financial year-end); retail property makes up 21 per cent of the portfolio (mainly £265m in the UK); and residential property accounts for a further £650m of assets of which £426m is in the UK and £224m in the US. Industrial, leisure, care homes and land & development assets worth £100m in aggregate account for the balance of the £1.27bn portfolio.

But the key attraction for me is that £900m of these assets are located in the prosperous London and the South East of England and New York. It’s therefore not surprising, given the strength of the London property market, that some of the properties have achieve bumper prices when sold. For instance, a freehold in St Johns Wood, north London, was sold for £23.6m in the previous financial year, a hefty £11m above book value. Daejan has some prime commercial assets as well including Grade II listed Africa House which will offer 118,000 sq ft of prime London West End space when the redevelopment is available for occupation in the middle of this year.

Moreover, not only is the quality of the book good, but it generates solid returns as annual rental income of £108m easily covers Daejan’s operating expenses of £68m, administration expenses of £11.1m and an interest bill of £11.3m last year. So even without having to sell any property assets the company can easily afford to pay out the £12.4m, or 76p a share, in annual dividends declared to shareholders. On that basis, the shares, at 3300p, have a current yield of 2.3 per cent.

Hefty discount to book value

When Daejan last issued interim results at the end of last year, the company’s net asset value had increased by 135p a share to 5425p a share in the six month period to 30 September 2012, or by 272p a share on a 12 month basis. In fact, since March 2009, net asset value per share has risen by 16 per cent from 4660p to 5425p and that’s after paying out three years worth of dividends, too.

True, returns of that nature may not get the pulse racing, but frankly they don’t have to because Daejan offers a low risk way of gaining exposure to the London and New York property markets and one where the underlying value of the company’s assets are already 60 per cent above the price investors are being asked to pay for the equity of the company. Even if that valuation gap narrowed by a third that would still offer us 25 per cent share upside to take the share price to around 4000p. Even then the share price discount to book value would still be 26 per cent and that’s before factoring in a reasonable amount of net asset growth in the second half of the financial year, not to mention valuation uplifts on developments.

Trading strategy

My strategy here is simple. I believe Daejan’s share price will break above the 3350p level in the near future to take out the high from April last year and would be a buyer of the shares on this basis, targeting a fair value price of 4000p. However, I am willing to jump the gun here and buy ahead of a likely break-out with the current offer price in the market around 3300p.

■ Please note that I have released five online articles since Monday: 'A share set to hit the jackpot','A highly profitable arbitrage play, 'Seeking Alpha among the housebuilders'. 'Chart break out for a solid income play' and 'Time to dial into profit'.

Finally, I will be taking a four-week break during April to complete a book on 'Profitable stockpicking', my follow-up to Trading Secrets: 20 Hard and Fast Rules to Help You Beat the Stock Market. The book will be published in early summer.

MORE FROM SIMON THOMPSON ONLINE...

Since the start of this year I have written no fewer than 29 online articles, all of which are available on my homepage. These include articles on the following companies or investment strategies:

IQE (Time to dial into profit, 13 February 2013)

Mountview Estates ('Chart break out for a solid income play', 12 February 2013)

Bellway (Seeking Alpha, 11 February 2013)

Marwyn Value Investors (A highly profitable arbitrage play, 11 February 2013)

Netplay TV (A share set to hit the jackpot, 11 February 2013)

Oakley Capital, Randall & Quilter, Inland, Terrace Hill, Heritage Oil, Cairn Energy, Polo Resources, Trifast, Noble Investments, Fairpoint (Bargain Shares for 2013, 8 February 2013)

Telford Homes, MJ Gleeson, Stanley Gibbons, Molins, Indigovision, Trading Emissions, Mallett, Bloomsbury Publishing, Rugby Estates, Eurovestech (How the 2012 Bargain Shares fared, 8 February 2013)

Future (Decision time after a bright start, 5 February 2013)

Sanderson (An 'app' online investment, 5 February 2013)

Aurora Russia ('Time to play Russian Roulette', 4 Feb 2013)

BP Marsh & Partners ('Hyper value gains', 31 Jan 2013)

Bellway ('Profit from the London property boom', 30 Jan 2013)

Telford Homes, MJ Gleeson, Mallett, Rugby Estates ('Taking profits after a winning streak', 28 Jan 2013)

Market timing ('Lessons to learn', 24 Jan 2013)

Communisis, Netcall ('Bumper trading gains', 23 Jan 2013)

Crystal Amber, API, Sutton Harbour ('More upside to come', 22 Jan 2013)

PV Crystalox Solar ('Seeing the light', 21 Jan 2013)

Bloomsbury Publishing ('A publisher for the digital age', 18 Jan 2013)

Housebuilders first-quarter effect and performance table on all my recommendations from the final quarter of 2012 ('Stockpicking Marvels, 16 Jan 2013)

Eros ('A share firmly in the picture', 15 Jan 2013)

Netcall ('Jumping the gun: take two', 15 Jan 2013)

Moss Bros, Communisis ('Jumping the gun', 14 Jan 2013)

Stanley Gibbons, MJ Gleeson, Spark Ventures ('Small cap wonders', 11 Jan 2013)

IQE, Trading Emissions ('A tech share worth buying now', 10 Jan 2013)

S&P 500 portfolio of dog shares ('Dog shares barking back', 8 Jan 2013)

Air Partner ('A share ready to take off', 7 Jan 2012)

FTSE 100 traded options strategy ('Highly profitable options', 3 Jan 2012)

Telford Homes, MJ Gleeson, Molins, Noble Investments ('Rampant bargain shares', 31 Dec 2012)