One way of protecting yourself, and your unrealised profits, is to put in place a trailing stop-loss policy whereby you exit the holding as and when the share price falls 10 per cent below the highest price traded during your holding period. It is also good practice to revisit the investment case to see whether or not the rationale for making the investment in the first place still holds.
Clearly, this is not an exact science. For instance, I bailed out of east London housebuilder Telford Homes (TEF: 313p) at the end of January this year, feeling pretty content with a 124 per cent gain in under 12 months. At the time, I reasoned that priced on a 33 per cent premium to March 2014 net asset value estimates, and on 11 times earnings forecasts for that financial year, the shares had run their course. I was wrong. Telford's share price duly rallied a further 60 per cent, albeit I did recommend buying shares in the eight FTSE 350 housebuilders at the start of the year, so we maintained exposure to the sector. On average, those shares rocketed by more than 25 per cent in the first quarter and by 35 per cent over a four-month period.
The main point here is that I was happy to bank the profits at the time because I felt Telford's valuation was starting to look full. Clearly, I could not have predicted the largesse of the government a few months later when chancellor George Osborne announced in his March Budget the most radical overhaul of the housebuilding industry since the second world war. News of a new government mortgage guarantee scheme sent housebuilders' share prices soaring across the board.
Ultimately, I can only react to what I know at the time, and factor in likely newsflow in the future, to gauge whether, based on fundamentals and from a technical perspective, a company's share price is fair value. This is the task I have in today's column as two of the property companies I suggested buying in the spring have both hit my target prices and urgently need updating.
To bank profits or not?
Shares in property company Daejan Holdings (DJAN: 4000p) have recovered all of the lost ground after the sharp market sell-off in June and have come to within a whisker of hitting 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 Feb 2013). By the end of April, the price had soared more than 20 per cent. As a result, the share price discount to net asset value 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, not to mention significant valuation uplifts on developments. I also had a fair idea that the results for the financial year would be impressive. I was not disappointed, as a few weeks ago Daejan reported that pre-tax profits for the 12-month period rocketed from £41m to over £111m, reflecting 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 more than three-quarters of the portfolio is 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 and 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-and-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.
Assess the valuation and the chart
Following the 20 per cent plus re-rating in Daejan's share price, a significant part of the valuation anomaly has corrected itself. At around 4,000p, the shares now trade on a 33 per cent discount to net asset value. Clearly, a deeper than normal share price discount to book value is in order given the substantial family holdings, and the lack of disclosure from the company. After much deliberation, I have concluded that a structural discount of around 25 per cent is in order, implying a fair value share price of around 4,500p. The dividend is modest, but at least income investors get a yield of around 2 per cent, which is worth having.
Importantly, there are no financial concerns as net debt of £223m is secured against properties worth £1.4bn. A loan-to-value ratio of 16 per cent is comfortable as rental income of £111m covers the interest charge more than 10 times over.
From a charting perspective, a move through the May high of 4,085p and July's high of 4,068p would open up the door for a triple-top breakout on a close of 4,100p or above. In turn, this could lead to a sharp 10 per cent share price rally to my 4,500p new target price. In the circumstances, I am running my profits and placing a tight trailing stop-loss at 3,900p, the low hit after the recent high.
Rampant London property
Shares in Mountview Estates (MTVW: 5830p) have surpassed my expectations. Not only have we banked a 125p-a-share dividend following full-year results last month, but we also pocketed a 50p-a-share half-year dividend earlier this year. For good measure, the share price has risen from an offer price of 5,050p when I advised buying earlier in the year ('Chart breakout for a solid income play', 11 Feb 2013) to the current bid price of 5,700p. Taking dividends and capital gains into consideration, this represents a decent 16.3 per cent total return on invested capital in the past six months.
To recap, the company holds a portfolio of investments in three specific niche areas: regulated tenancies, ground rent units and life tenancies. The book value of regulated tenancies is around £274m, of which £149m are in London and a further £73m in the south-east and home counties. Mountview owns more than 2,500 residential properties under regulated tenancies, which account for 90 per cent of the company's portfolio by value.
When the company updated shareholders a month ago, the board reported that pre-tax profits had surged 26 per cent in the financial year to March 2013. The company made EPS of 568p, which easily covers the annual 175p-a-share dividend. It doesn't take a genius to work out that difference of 493p a share between EPS and the annual dividend is boosting the company's net asset value, which is why Mountview reported a 7 per cent increase in book value per share to 6,255p in the 12 months to the end of March. So, with the shares priced on a bid-offer spread of 5,700p to 5,825p, the discount to net asset value is currently 7 per cent.
However, with the company's core regulated tenancy portfolio held at the lower of cost or net realisable value, and given Mountview's exposure to the rampant London property market, my instinct is that the price has further to run. Moreover, from a chart perspective, there is little overhead resistance until well north of 6,000p. The price pulled back from 6,035p at the end of May, but I believe the technical set-up is favourable for a revisit to that level and beyond. Therefore, I would advise running your profits. My new target price is 6,300p and my stop-loss is 5,500p.
Please note that I will update the investment case on both Inland (INL: 32p) and WH Ireland (WHI: 59p) as soon as I have completed my research and analysts have released their updated estimates.
Finally, I updated the investment case on 11 small-cap shares in three other online articles yesterday: Small-cap wonders; Deep value plays and Small-cap trading buys. I have also analysed the investment case on three more small-cap companies in three other online articles today: Undervalued and Unloved and Capitalising on capital returns and Indigovision shares slump on warning.
