Daejan: NAV Reaches New £119 Per Share High But Management Remarks Of Slowing Growth Now Leaves Price-To-Book At 46%

14 August 2019
By Maynard Paton

Results summary for Daejan (DJAN):

  • These full-year figures set new records for revenue, up 9%, net asset value, up 7% and the dividend, up 3%.
  • The 3.5% valuation gain was DJAN’s lowest since 2012 following the “uncertainty” caused by Brexit. Management remarks suggested current-year growth could slow further.
  • A significant purchase in the States has lifted the proportion of US properties to 29% of the group’s estate.
  • The accounts remain conservatively financed and the property valuations continue to appear prudent.
  • The share price represents only 46% of net asset value — the lowest percentage for seven years. I continue to hold.

Contents

Event link and share data
Why I own DJAN
Results summary
Revenue, profit, dividend and net asset value
Investment properties
Cash flow and borrowings
Valuation

Event: Preliminary results for the twelve months to 31 March 2019 published 23 July 2019.

Price:
£55
Shares in issue: 16,295,357
Market capitalisation: £896m

Why I own DJAN

djan daejan fy 2019 results africa house
  • Commercial and residential property landlord that boasts an illustrious, 40-year-plus history of net asset value and dividend advances.
  • Board led by veteran family management that continues to control an aggregate 80%/£717m shareholding.  
  • Net asset value of £119 per share is more than double the recent share price.

Further reading: My DJAN Buy report |All my DJAN posts| DJAN website

Results summary

djan daejan fy 2019 results summary

Revenue, profit, dividend and net asset value

  • For the full year, revenue gained 9%, NAV climbed 7% while the dividend was lifted 3%:
Year to 31 March20152016201720182019
Net asset value (£k)1,345,8181,480,0251,655,7151,812,9021,940,354
Net asset value per share (p)8,2599,08210,16111,12511,907
Revenue (£k)128,976138,197140,738142,885156,161
Operating profit (£k)47,11455,14852,24153,21562,677
Profit on property disposal (£k)12,03611,72514,59411,98312,203
Net valuation gain (£k)229,722117,947144,508146,43883,928
Finance expense (£k)(11,763)(12,692)(13,532)(12,794)(21,852)
Other items (£k)4301,1145852,510876
Pre-tax profit (£k)277,539173,242198,396201,262137,832
Earnings per share (p)1,3958779931,245736
Dividend per share (p)889398103106
  • For the first time since 2016, the second half showed greater revenue from both DJAN’s UK and US operations than during the first half:
H1 2018H2 2018FY 2018H1 2019H2 2019FY 2019
UK revenue (£k)45,60246,79392,39547,82252,542100,364
US revenue (£k)25,66824,82250,49026,14429,65355,797
Total revenue (£k)71,27071,615142,88573,96682,195156,161
Valuation gain (£k)29,536116,902146,43832,52151,40783,928
  • Full-year rental income advanced a useful 8% to £142m.  The terse results RNS only revealed: “The [rental income] increase has principally been driven in the UK by the completion of the Travelodge hotel and other developments. In the USA the main factor has been the acquisition of three new residential properties at a total cost of $98 million.
  • At least the annual report (see below) subsequently gave a few more details about the sources of the higher rental income:
    • the completion of a 395-bedroom London Travelodge hotel;
    • the conversion of a Brighton office block into 63 flats;
    • the purchase of 552 apartments in Florida, and;
    • the purchase of 62 apartments in New York.
djan daejan fy 2019 results travelodge london city
  • Expenses did not climb as fast as revenue, leaving full-year operating profit at a record £63m. The 40% operating margin for 2019 was the highest since 2003 (41%).
  • Earnings were bolstered by the usual sale of lease extensions (accounted for as ‘profit on property disposals’) and an £84m valuation gain.
  • The £84m valuation gain was DJAN’s lowest since 2013 (£83m) and represented a 3.5% increase on the £2.4b year-start value of the group’s investment properties. The 3.5% increase was the lowest since 2012 (1.3%).
  • DJAN claimed “uncertainty created by Brexit and political risk has led to a reduction of foreign investment, which in turn has had a depressive effect on some commercial and residential values in central London. So far as residential property is concerned, this was offset by modest gains in value in outer London, so that Greater London as a whole showed [valuation] growth of 3.9%”.
  • Some 70% of DJAN’s UK assets by value (£1,280m of £1,804m) are located somewhere in London.
  • The all-round progress added a net £127m to the balance sheet and lifted NAV to £119 per share.
  • The results extended DJAN’s illustrious long-term record. After the current chairman took charge during 1980, NAV has since soared 87-fold (+12% average), the dividend has since expanded 29-fold (+9% average) while rental and other income has since multiplied 16-fold (+7% average):
djan daejan fy 2019 results sharepad chart nav history

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Investment properties

  • The $98m purchase of three US apartment buildings left DJAN’s US properties representing their highest-ever proportion of the group’s total estate — 29% (£750m of £2,555m).
  • The weaker GBP assisted the valuation of the US properties. GBP:USD fell from 1.40 to 1.30 during the year and produced a £45m (£2.78 per share) foreign-exchange translation gain.  
  • DJAN’s US properties also benefited from a £32m valuation gain — equivalent to a 5.1% improvement, albeit the lowest uplift since 2011 (3.5%). 
  • Including DJAN’s other US assets and the associated borrowings, US net property assets now represent 21% of the group’s capital.
  • Translated at the recent GBP: USD 1.21, DJAN’s US net property assets would increase by £30m or £1.82 per share.
  • The $98m purchase of three US apartment buildings has meant residential properties (UK and US) now represent their highest-ever proportion of the group’s overall estate — 57% (£1,465m of £2,555m):
Year to 31 March20152016201720182019
UK property valuation
Commercial -- Greater London (£k)468,400512,627524,615548,284549,761
Commercial -- other (£k)381,700391,373426,450468,035436,634
Residential -- Greater London (£k)538,000577,796659,160702,488729,924
Residential -- other (£k)56,40051,01958,40580,52687,879
US property valuation
Commercial (£k)52,70061,16284,56887,062103,036
Residential (£k)365,400426,710517,898505,343647,432
Total (£k)*1,862,6002,020,6872,271,0962,391,7382,554,666

(*excludes lease incentives)

  • UK properties enjoyed a £52m/2.9% valuation uplift — the lowest since 2012.
  • The benefits of ‘yield compression’ — whereby property valuations are marked higher as investors decide to pay more for rental incomes — may now have stalled:
Year to 31 March20152016201720182019
Rental income (£k)112,847117,733125,522131,323142,364
Service charge income (£k)16,12920,46415,21611,56213,797
Total revenue (£k)128,976138,197140,738142,885156,161
Investment property (£k)1,855,2302,009,3612,256,8002,373,1842,532,518
Rental income/Average investment property (%)6.66.15.95.75.8
  • Rental income as a proportion of the average value of the property estate increased a fraction to 5.8%. DJAN’s ‘valuation yield’ had compressed from 7.5% to 5.7% between 2012 and 2018.
  • Many of DJAN’s residential properties are regulated tenancies — the type owned by fellow portfolio member Mountview Estates — and therefore collect little rent in comparison to their value.
  • Group subsidiary Daejan Properties Limited provides a good example. For 2018, this subsidiary reported rent of £12.4m and carried investment properties that averaged a £371m value during the year. The subsidiary’s rental yield was therefore 3.3%. 
djan daejan fy 2019 results daejan properties limited 2018 investment note
  • Other UK properties must therefore sport higher yields, which I would like to think suggests the balance-sheet valuations are prudent. I calculate DJAN’s UK commercial properties are valued at an average 6.5% rental yield. The annual report small-print (point x) claims some sites are valued at yields above 30%.

Cash flow and borrowings

  • DJAN spent an enormous £108m buying new sites and developing old properties during 2019:
Year to 31 March20152016201720182019
Operating profit (£k)47,11455,14852,24153,21562,677
Acquisition/development of investment property (£k)(43,460)(26,939)(27,726)(39,424)(108,463)
Proceeds from sale of investment property (£k)16,77212,80718,24216,08516,098
Working-capital movement (£k)(5,909)*6,381*(13,088)3,2654,948

(*estimated)

  • The £108m was the largest sum spent enhancing the estate during any year for at least two decades.
  • The significant expenditure meant gross debt increased by £81m to £431m and net debt increased by £83m to £335m.
  • Nonetheless, net debt is equivalent to only 13% of the full property portfolio — a very conservative level of gearing:
Year to 31 March20152016201720182019
Net debt (£k)(252,117)(237,065)(268,256)(251,707)(334,859)
Investment property (£k)1,855,2302,009,3612,256,8002,373,1842,532,518
Net debt/Investment property (%)(13.6)(11.8)(11.9)(10.6)(13.2)
  • Bank interest represented a reasonable 3.9% of the average debt employed during the year. Operating profit covered net interest payments a respectable 4.1 times:
Operating profit (£k)47,11455,14852,24153,21562,677
Interest expense (£k)(11,751)(12,683)(13,519)(12,615)(15,313)
Average debt (£k)(297,995)(313,252)(337,252)(351,499)(390,607)
Operating profit/Interest expense (x)4.014.353.864.224.09
Interest expense/Average debt (%)3.94.04.03.63.9
  • Net debt could be reduced during the current year should DJAN sell a £71m London property that is “held for sale” on the balance sheet. DJAN claimed the disposal was “highly probable”. The purchaser is Unite Group.

Valuation

  • DJAN’s outlook was very measured.
  • Brexit, “headwinds in the retail market” and the chance of “further adverse [letting] regulations” were cited as reasons why the UK property market may in the near-term produce “only modest valuation gains at best”.
  • Management added “the risk of recession in the UK from both internal and external influences appears to be growing”.
  • In the US, “the outlook is still for solid growth although uncertainties have increased… the immediate outlook is less positive than in recent years.”
  • DJAN noted: “New rent regulation laws in New York state that came into effect on 1 July 2019 are expected to depress New York residential values in the coming year”. The “majority” of DJAN’s US residential properties are located in New York.
  • This time last year the chairman remained confident: “We are always long term in our approach and I remain confident that the pursuit of our tried and tested strategy will ensure that the Group continues to progress.
  • Now the chairman is referring to possible storms: “[W]e believe that by the pursuit of our well proven strategy of prudence and risk minimisation coupled with the conservation of cash and bank resources we will be well placed to ride out any storms which may lie ahead.
  • A major project that could support growth — the development of a block of properties at the eastern end of Oxford Street, London — has been deferred by at least a year. Construction work is now “unlikely to commence” before 2021 following an opportunity to “improve and extend” the site.
  • The upshot is not to expect NAV fireworks for 2020: “In the immediate future we are unlikely to experience the rate of growth in net asset value that we have enjoyed in recent years.”
djan daejan fy 2019 results property greenwich
  • The subdued management remarks explain why the share price has effectively gone nowhere during the last five years — and trade at only 46% of the group’s NAV.
  • Other, long-standing, reasons for DJAN’s hefty discount include the board’s 80% family shareholding, the absence of any takeover possibilities, management’s unconventional corporate governance and a lack of City engagement.
  • The emerging debate about executive diversity has not helped market sentiment either. 
  • DJAN has never employed a female director — and the board’s “strictly Orthodox background and beliefs” are unlikely to prompt a change any time soon. Diversity campaigners are not impressed. 
  • I remain hopeful that, one day, the discount to book will permanently narrow as the group’s performance and size become too difficult for the wider stock market to ignore.
  • Until then, the present discount does appear greater than usual.
  • The SharePad chart below compares the share price (the black line) with the price to NAV (the green line):
djan daejan fy 2019 results sharepad chart price and price to nav
  • Investing at the current 46% price to NAV — that is, when the green line falls to, or dips beneath, the straight blue line — has generally worked out well for investors. (The blue circles highlight previous buying opportunities at a 46% price to NAV).
  • Only during two market extremes — the ‘old-economy’ sell-off of 2000 and the banking-crash lows of 2009 — has the price to book ever dropped below 40% within the last 20 years.
  • Another way of looking at DJAN’s value is from a return on equity standpoint.
  • During recent ten-year periods, DJAN has earned at least 7.6% a year from its asset base:
10yrs to 201510yrs to 201610yrs to 201710yrs to 201810yrs to 2019
Start NAV (£)38.9445.7452.8855.4046.60
End NAV (£)82.5990.82101.61111.25109.07
Dividends accumulated (£)7.557.838.118.418.74
Total return (£)51.2052.9156.8464.2681.22
Total return/Start NAV (CAGR %)8.88.07.68.010.6
  • Assuming DJAN can earn an average of, say, 7.5% a year from its £119 per share asset base, typical annual earnings could be £8.93 per share — represented by a mix of rental profit and valuation gains.
  • In theory at least, enjoying £8.93 per share a year from a £55 entry price is equivalent to a very worthwhile 16% annual return.
  • However, perhaps a business that earns a return on equity of only 7.5% deserves a modest rating and should be valued at a discount.
  • The trailing 106p per share dividend meanwhile supports a modest 1.9% income.

Maynard Paton

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Disclosure: Maynard owns shares in Daejan.

One thought on “Daejan: NAV Reaches New £119 Per Share High But Management Remarks Of Slowing Growth Now Leaves Price-To-Book At 46%

  1. Maynard Paton Post author

    Daejan (DJAN)

    Publication of 2019 annual report

    Here are points of interest.

    1) Outlook

    The full management outlook comments felt more pessimistic than those contained within 2018’s annual report:

    2) Operating risks

    Underlining management’s caution, “conservation of cash and bank facilities” has been added as a mitigation against economic risks:

    I see “such as we presently face” has been added to the same text from last year to emphasise management’s pessimism:

    A new separate risk for the retail sector has been introduced:

    I note the word “will” in the line “downward pressure… will continue

    3) Oxford Street, London

    This project was first mentioned in the 2015 annual report and I guess the subsequent progress underlines how long property development can take:


    I am hopeful the final development will create a not-insignificant NAV improvement.

    4) Director pay

    The Freshwater brothers enjoyed a £50k pay rise and now earn £1.25m each:

    The chairman’s salary has enjoyed a 7.5% CAGR over 5 years, 6.0% over 10 years and 6.5% over 20 years. In comparison, shareholders’ income through the dividend has grown at a 5.3% CAGR over 5 years, 3.8% over 10 years and 4.5% over 20 years.

    Executive pay is therefore out-running dividend growth, which is not ideal. I suppose the generous salaries could be excused given the board’s extended track record of reliable NAV and dividend increases. At least DJAN does not operate any option or director-bonus schemes.

    The AGM voting was broadly the same as the year before:

    The 624k votes against are equivalent to c20% of the 3.3m shares (20%) that are not controlled by the board’s family interest.

    5) Gender diversity

    The diversity campaigners (see my blog post above) have had an impact on the annual report.

    This small-print is new:

    And so is this:

    So a female director could indeed be considered — if an opening for a new director appears. (I suspect an opening for a new director will not appear soon).

    6) Audit materiality and risks

    No issues here.

    Audit materiality remains (the standard) 1% of gross assets and £3.2m, equivalent to (the standard) 5% of operating profit. 100% of the group was audited, too.

    Levels of subsidiary materiality were left broadly unchanged and continue to require the auditor to dig reasonably deep:

    Two new audit risks were disclosed.

    The new Brexit risk is described as having “unprecedented” levels of uncertainty:

    DJAN’s chairman has been a board member since 1971, and I suspect has witnessed plenty of “unprecedented” uncertainties during his directorship tenure.

    I am pleased the auditor found nothing untoward when evaluating the new ‘going concern’ risk:

    One risk that has decreased is tax:

    DJAN has agreed to a settlement with HMRC (see point 10 below)

    I did not realise DJAN had employed the same auditor for 60 years:

    A tender process could be held soon.

    7) Accounting changes

    No issues here:

    The effect (if any) of IFRS 16 — the new rules for lease accounting — on Daejan will be interesting to see, given the group is “primarily a lessor, whereas the standard primarily affects lessees.”

    8) Service charge

    DJAN’s revenue can be influenced by service-charge income:

    For 2019, such income represented £14m/9% of revenue.

    From a previous discussion, I understand this income does not have a material effect on profit.

    9) Employees

    The number of full-time equivalent employees paid by DJAN to the property-service companies controlled by management (see point 19 below) has impressively remained in the 139-149 range seen since 2005:

    The average cost of such employees is now £51k each — up £2k on 2018 and up £9k on 2014.

    10) Tax

    The small-print revealed DJAN paid £6.4m interest on overdue taxes:

    Further small-print revealed DJAN has agreed to pay HMRC overdue taxes of £37m:

    The 2018 small-print said any settlement could be between £23m and £52m.

    11) Investment properties

    The majority of properties remain freehold:

    12) Valuations

    The following table contains the data that led me to calculate the group’s UK commercial properties are valued at a 6.5% average yield:

    Some units are valued at a 36% rental yield.

    Shopping centres have lost some value, but care homes — bought in 2008/9 for £33m from a troubled owner — may now be operating well following years of difficulties:

    Leisure & Services properties — which include the Travelodge hotel and the revitalised care homes — now carry a £181m value, a £40m or so improvement on 2018 and almost a £100m improvement on 2017:

    UK retail properties declined by a surprisingly small £12m to £406m. Back in 2009 the value was £208m.

    The US valuations are now performed by a single valuer, after Joseph J. Blake & Associates was dropped:

    13) Held for sale assets

    DJAN has introduced a new ‘held for sale’ classification to accommodate the “highly probable” sale of a particularly significant property:

    The sale should go through before the end of December.

    14) Cash

    I keep overlooking that DJAN carries tenant deposits on its balance sheet, which should not be deemed as company cash and therefore not included in my net debt calculations:

    15) Loans and interest

    The majority of loans remain denominated in USD and are repayable after 5 years:

    The new fixed-rate mortgages taken on incur interest between 4% and 5%:

    I see the weighted-average interest rate for GBP fixed-rate borrowings fell notably. Approximately 83% of DJAN’s loans are fixed rate, with the balance variable rate.

    16) Foreign-exchange impact

    £36.2m is equivalent to £2.22 per share.

    17) Future lease income

    I am not entirely sure whether this note is truly significant:

    The numbers indicate DJAN’s tenants have agreed to pay the group at least £605m of future rent — an £156m increase during the year and presumably due in part to the Travelodge hotel completion.

    The £605m figure is a new high — the figure previously bounced between £550m and £392m between 2010 and 2018. I have not yet determined how rental income can increase over time while the level of committed future rents can bounce up and down.

    18) Trade receivables

    Nothing too dramatic here:

    Rent and service-charge receivables of £43m represent 27% of revenue — no improvement on 2018 and still above the 20% or so seen up to 2015. DJAN’s cash flow has shown no obvious debtor-collection issues.

    Rent and service-charge receivable impairments of £8m are notably the lowest since 2014 and, at 15%, are the lowest proportion of gross rent and service-charge receivables since the figures were first disclosed during 2010.

    19) Related party transaction

    DJAN was charged £1m less by the board’s property-management businesses:

    I have previously investigated these property-management businesses and the transactions all appear above board.

    20) Alternative performance measures

    These measures are new for 2019. Nothing too radical has been included.

    This alternative-performance table is handy, as the group’s property movements — and underlying valuation gain — are neatly summarised:

    Maynard

    Reply

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