With this in mind, it’s worth pointing out that the mood of investors’ has a habit of moving from periods of overexuberance to unwarranted pessimism during market corrections. So, it’s well worth keeping an eye on investor surveys to gauge when the pessimism is overdone.
The survey I focus on the most is the AAII Investor Sentiment Survey in the US which measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months. Individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period. Since 1987, the average readings of participants have been: 38.8 per cent bulls; 30.6 per cent neutral; and 30.6 per cent bearish.
The latest survey showed 30.3 per cent of US retail investors are now bullish, with 35.2 per cent bearish, so the difference between bears and bulls is 4.9 percentage points in the bears' favour. This represents quite some pull back from the reading at the time of the stock market high on 23 May when bulls outnumbered bears by a massive margin of 27.4 percentage points. But it still falls somewhere short of the readings on 18 April when bears outnumbered bulls by a ratio of almost 2:1. This coincided with the point in time when the five week rally to those market highs commenced. From my lens, we still need some more participants to ditch their neutral and bullish bias and switch into the bear camp, before sentiment is overly negattive and the foundations for a multi-week rally are in place. You can monitor the weekly readings for free at www.aaii.com/sentimentsurvey.
Regards my own investment approach, very little has changed in the past week. I will continue to target special situations which I believe offer scope for medium-term gains even in a less than favourable market backdrop. On this score, two of the companies I have live buy recommendations on made announcements yesterday and the investment cases require updating.
Time to capitalise on LMS
LMS Capital (LMS: 78.5p), an investment business in the process of winding itself up, and a company I have followed for some time, has now announced the schedule of the tender offer I flagged up in my article a couple of weeks ago (‘Fed watch’, 17 June 2013).
The company is returning £35m of its £42.2m cash pile to shareholders at the end of this month which equates to 17.4 per cent of LMS Capital’s net asset value of £201.5m. The tender offer opens on Monday, 8 July and all shareholders (other than certain overseas shareholders) on the register at the close of business on Monday 22 July may tender more, equal to or less than their basic entitlement. It’s worth pointing out that tenders in excess of a shareholder's basic entitlement will only be accepted to the extent that other shareholders tender less than their basic entitlement and will be satisfied on a pro rata basis.
The tender offer price will be calculated on 29 July based on the unaudited net asset value of LMS Capital at 30 June. This figure will be adjusted to take into account of: price movements in quoted investments; changes in exchange rates; and purchases and sales of investments between 30 June and 28 July. An announcement will be made on 30 July with the results of the offer and Crest accounts will be credited with the tender proceeds in the week commencing Monday 5 August. Cheques will also be despatched at the same time in respect of investors with certificated ordinary shares.
So, on the basis book value of LMS shares was 89p at the end of March, and the current share price is 78p, then it makes sense to tender all of your shares. You have absolutely nothing to lose at all. Realistically we should be looking at a tender offer price of around 89p.
Smart method of returning capital
This is the second tender offer by LMS as the company repurchased 17.4 per cent of the issued share capital through a tender offer at 84p a share last autumn. Importantly, this method of capital return enabled shareholders to sell down further chunks of their holdings at book value without impacting the share price. It also means that existing shareholders, or anyone buying LMS shares now for that matter, is in effect guaranteed a 14 per cent profit on 17.4 per cent of their holding.
In addition, there is scope for the share price discount to book value to narrow further. That’s because some investors will undoubtedly use the cash proceeds from the tender offer process to buy back the LMS shares they tender at book value of 89p, but at a lower price in the open market.
As regular readers of my columns will know, LMS is a long-term favourite of mine. I first recommended buying the shares at 54.5p in February 2011 ('Capital returns', 11 February 2011), and repeated that advice when the price was 64p ('Time capitalise on LMS', 25 Jun 2012) and at 66p ('Happy capital returns', 17 December 2012). Following the first-quarter trading update, I reiterated the advice again at 71.5p ('Target price smashed', 15 May 2013).
My advice here is clear: tender all of your shares. If other shareholders fail to tender their allocations, you may manage to sell far more than 17.4 per cent of your shareholding at the company’s net asset value.
A solid property play
Shares in property company Daejan Holdings (DJAN: 3786p) have recovered much of the lost ground after the sharp market sell-off last month and look to be on the way back to their 12 month high of 4,085p.
To recap, I advised buying shares at 3,300p in the company in mid-February ('Buy the breakout', 14 February 2013). By the end of April the price had soared more than 20 per cent to a high of 4,045p. As a result, the share price discount to net asset value of 5,425p had narrowed to around 26 per cent. It also meant that the shares had hit my target price of 4,000p. Admittedly, the low free float means that price moves are accentuated; the company is controlled by the Freshwater family who own over 70 per cent of the share capital through direct interests, beneficial holdings and shares held in trust.
Still, I decided not to bank profits when I updated the holding in early May (‘Hot property’, 1 May 2013). That's partly because I could see scope for a reasonable amount of net asset growth in the second half of the financial year to end March 2013, and beyond, not to mention significant valuation uplifts on developments. I also had a fair idea that the forthcoming results would be impressive. I was not disappointed as Daejan has just reported that pre-tax profits for the 12 months to end March 2013 rocketed from £41m to over £111m. This mainly reflects an eye-catching £82.7m valuation surplus on the £1.4bn investment property portfolio in the UK and US.
The company’s key attraction is that over three-quarters of Daejan's portfolio is located in the prosperous areas of London, south-east England and New York. In terms of the property mix split, offices and retail property both account for around 20 per cent each of the portfolio, and around half the book is in residential property. Industrial, leisure, care homes and land & development assets account for the balance of the £1.4bn portfolio. So, given the strength of the London property market, some of Daejan's properties have been producing sharp valuation uplifts. These are booked through the profit & loss account which explains why full-year earnings per share surged from 202p to 550p. It also explains why net asset value rose by £80m to £984m, or the equivalent of 6,044p a share, up from 5,546p in March 2012.
As a result of these valuation uplifts, Daejan shares are now trading on a 37 per cent discount to net asset value. True, some share price discount is in order given the substantial family holdings, but this seems excessive in light of further potential valuation uplifts. There is a yield for income investors too; the final dividend was raised 6 per cent to 54p a share to give a total of 79p, so the yield is 2 per cent. Importantly, there are no financial concerns as net debt of £223.6m is secured against properties worth £1.4m. A loan-to-value ratio of 16 per cent is very comfortable especially as rental income of £111m covered the interest charge for the 12 month period more than 10 times over.
Trading on a spread of 3,752p to 3,786p, Daejan shares are up 13 per cent on my buy advice on an offer to bid basis, and my advice is to run your profits. My target price is 4,000p.
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