True, after the price surge in 2013, one you would have benefited from if you followed my advice to buy Daejan’s shares at 3,300p ('Buy the breakout', 14 February 2013), progress was likely to be less marked this year. But there are still good reasons to expect my target price of 5,800p to be hit. For instance, having reported a 12 per cent increase in net asset value (NAV) per share to 6,815p in the 12 months to end March 2014, Daejan shares are still being rated 28 per cent below historic book value and even at my target price the share price discount would still be 15 per cent. Moreover, net assets have clearly risen since that financial year-end, reflecting the buoyant London market for both commercial and residential property.
Admittedly, some discount is in order given that the Freshwater family dominate the company’s share register and the board. In fact, they control well over 70 per cent of the issued share capital through direct interests, beneficial holdings and shares held in trust. But a discount this deep is extreme to say the least.
Hot off the press
I last updated the investment case after the release of a bumper set of full-year figures in late July when the share price was around the current level (‘Hot property’, 10 July 2014), since when the company has announced the letting of Grade II-listed Africa House near the Aldwich, London, a property offering 118,000 sq ft of prime London West End space. Legal firm Mishcon de Reya has taken the whole of the property which was being marketed at £59.50 per sq ft, implying a rent roll north of £7m for Daejan. To put this into perspective, the company’s UK office portfolio accounted for £293m of the UK commercial property portfolio of £693m at the March year-end, but that was before Africa House had secured a tenant.
Given that capital values in London’s West End now exceed £1,100 per sq ft for prime office space, then it’s fair to assume that there will be a significant uplift in the company’s book value per share once Africa House is revalued with its new tenant in place. In fact, I would not be surprised to see the property being valued at around £150m based on an initial yield of 4.6 per cent. To put that into some context, Daejan’s total investment portfolio was worth £1.55bn at the end of March 2014, so it’s not difficult to envisage Africa House adding 3 or even 4 per cent to Daejan’s last reported net asset value of £1.15bn. And this is not an isolated case as I estimate that valuation gains, development profits and retained earnings have contributed to a £420m increase in shareholder's funds in the past five years.
In addition, the company has reached a resolution on a contested rent review of the Strand Palace Hotel in London’s theatre land. Combined with the letting of Africa House there will be a one-off rental benefit in the order of £8m in the six months to end September 2014, and a similar sum will be added to the annual rent roll too. That’s significant as last year Daejan generated £97.8m of rental income and a further £14m from service charges on its properties.
Buoyant property prices
The good news doesn’t end there because since the end of March prices in the London residential market have risen to yet another all-time high. That’s important because four fifths of the company's UK portfolio is located in the prosperous areas of London and south east England, and residential assets, worth £593m, account for 43 per cent of a UK book worth £1.2bn. It’s only reasonable to expect further valuation uplifts on these assets, not to mention further gains on the commercial book given the elevated prices at which office and retail transactions have been going through the market this year.
In other words, expect a significant boost to net asset value per share when Daejan announces its interim results to end September at the end of next month. In the meantime you can look forward to a final payout of 47p a share on 14 November (ex-dividend date of 15 October). Based on a raised full-year payout of 82p a share, and a progressive one too as the board have lifted the payout by half in the past 11 years, the current dividend yield is 1.7 per cent. It’s rock solid too as the current rent roll covers the £13m cash cost of the dividend almost 10 times over.
Needless to say, I rate Daejan shares a decent buy on ahead of next month’s results which should act as the platform for the next leg up in its share price. From a technical perspective, a move above the 5,170p high earlier this year would be a major buy signal and would open the door to a swift rally to my 5,800p target price, a major price level dating back to March 2007.
■ Simon Thompson's 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 stockpicking'
