I first advised buying the shares at 3,300p in mid-February ('Buy the breakout', 14 Feb 2013) when I noted the investment potential. Admittedly, Daejan is a very unusual company which partly explains why the shares trade well below the value of those underlying assets. A low free float also 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.
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. And there is undoubtedly value on offer even after the 29 per cent share price rerating after I initiated coverage. Or put it another way, at the current price the company is being valued at £693m, or £350m less than shareholders funds of £1.05bn even though Daejan owns over £1.4bn of prime real estate.
Bumper valuation uplifts
The company's key attraction is that more than £883m of the £1.1bn UK portfolio is located in the prosperous areas of London and south-east England. Offices account for roughly 20 per cent of the UK book, retail over a quarter of the portfolio, and residential assets, worth £464m at the March financial year-end, account for well over 40 per cent. Daejan also has a US portfolio worth just over £300m, of which 85 per cent is residential. These stateside assets include a New York portfolio valued at £160m, another in Boston worth £35m and Florida properties which were last valued at £62m.
Given this weighting, it should not come as a surprise that some of Daejan's properties have been producing sharp valuation uplifts. In fact, in the six months to end September, the portfolio enjoyed a £47.7m valuation uplift, four times greater than at the same stage last year, driven by a buoyant London residential market and improvements in yields and rentals in commercial property. The Boston portfolio and Daejan’s prime New York properties have also performed strongly.
There should be scope for further gains at the full-year stage too. For instance, Daejan’s prime commercial assets include the Grade II listed Africa House in the Aldwich, London which has just been redeveloped earlier this month. Offering 118,000 sq ft of prime London West End space, there has been encouraging levels of letting interest in the development but Daejan can afford to take its time in securing top tenants, paying top rents, since the company has no financial concerns.
Low debt and rising rent roll
At the half year-end, Daejan had net debt of £208m secured against properties worth £1.45bn, so net borrowings represent less than 20 per cent of shareholders funds of £1.05bn. It also means that the loan-to-value ratio of 14 per cent is very modest indeed.
It’s worth noting too that total rental income rose over 5 per cent in the six month trading period to £56.2m which means an annual rent roll of £112m covers the interest charge almost 10 times over. Furthermore, rental income is on an upward trajectory, having risen from £96m to £111m in the past four financial years. And there have been some hefty valuation increases in the portfolio too; Daejan’s net asset value has risen from £759m in March 2009 to £1.05bn at the end of September. In turn, this has lifted net asset value per share from 4,660p to 6,449p, including a 405p a share uplift in the last six months alone.
So, with no debt concerns, a bumper and growing rent roll, the company’s board has been in the position to modestly increase dividends. Having paid out a final dividend of 54p a share in the last financial year, the interim payout has just been raised from 25p to 35p a share. It’s also rock solid since the company can easily afford to pay out the £12.8m in annual dividends declared to shareholders out of its bumper rent roll. The yield of around 2 per cent may be modest, but dividends are growing nonetheless. In fact, the payout has risen from 55p to 79p a share in the past decade.
Positive technical set up
From a charting perspective, a move through the August, October and November glass ceiling of 4,200p post this week’s results is a very bullish sign. In fact, Tuesday’s close at 4,259p signalled a quadruple top break-out on the point & figure chart (50 point) and one that is worth following.
It’s only realistic to assume this is the real deal given the positive technical set-up and the strong fundamentals driving the share price. The moving average convergence/divergence indicator is on the verge of giving a buy signal, the 14-day relative strength index (RSI) is not overbought and the share price is not over extended above its short-term 20-day moving average (4,100p) nor its 50-day average (around 4,000p).
In the circumstances, I am upgrading my target price from 4,500p to 5,200p, just below a key price level dating back to February 2007 and one that is likely to offer resistance. Even then the shares would still only be trading on a 20 per cent discount to book value. Currently offered in the market at 4,302p (closing price on Thursday, 28 November), I continue to rate Daejan shares a buy.
Finally, in response to recent newsflow, I am currently working my way through a long number of updates on the following recommendations: Bezant Resources (BZT), PV Crystalox Solar (PVCS), Crystal Amber (CRS), API (API), WH Ireland (WHI) and Pilat Media Global (PGB)
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In the past fortnight I have published articles on the following 16 companies or trading strategies:
■ Trifast ('A bolt-on purchase', 18 Nov 2013)
■ Global Energy Development ('Awaiting pay dirt', 19 Nov 2013)
■ Entertainment One ('Blue sky territory', 20 Nov 2013)
■ Marwyn Value Investors ('Blue sky territory', 20 Nov 2013)
■ Polo Resources ('Unloved and undervalued', 21 Nov 2013)
■ Heritage Oil ('Bargain shares update', 21 Nov 2013)
■ Eros ('Conundrum to solve', 25 November 2013)
■ Amino Technologies ('Conundrums to solve', 25 November 2013)
■ Town Centre Securities ('Time to make friends up north', 25 November 2013)
■ Raven Russia ('Cash in on a Russian property play', 25 November 2013)
■ Sanderson ('An app investment', 26 November 2013)
■ Equity market strategy ('Betting on a Christmas rally', 26 November 2013)
■ Eurovestech ('Kalibrate to fuel Eurovestech', 27 November 2013)
■ Housebuilders trading strategy ('As safe as houses', 27 November 2013)
■ Bovis Homes ('Bovis poised for chart break-out', 28 November 2013)
■ Netcall ('Dial into cloud-based profits', 28 November 2013)
