That's because the board's decision to ramp up the company's housebuilding operation means that the company is set to see profits rise sharply over the next few years. The government's Help to Buy mortgage guarantee scheme, and the Bank of England's Funding for Lending operations, are both clearly supportive of the housing market. Moreover, with the new Bank of England governor Mark Carney signalling that the low interest rate environment is here to stay for the next couple of years at least, this can only boost the confidence of home buyers and transaction levels. It makes Inland's decision to ramp up output well-timed, a fact which will become obvious to a wider investor audience next week.
For instance, analyst Duncan Hall at broking house finnCap expects Inland's pre-tax profits to have more than trebled from £1.6m to £5m in the year to end-June 2013, reflecting a surge in sales from £6.1m to £27.5m. In the 12-month period, Inland sold 55 units at an average price of £207,000 to generate housebuilding revenues of £11.4m, up from £1.7m in the prior financial year. In so doing, the company absolutely smashed forecasts of analyst Duncan Hall at broker FinnCap who upgraded his profit estimate by 25 per cent from £4m to £5m post a bullish pre-close trading update at the end of July.
Mr Hall is currently expecting Inland to sell 120 residential units in the current financial year to end-June 2014, which shouldn't be a hard task given the forward sales book was around £42.5m eight weeks ago. It could be much higher given the bullish trends we have been seeing in the housing market. On this basis, the housebuilding arm is set to generate current year revenue of £27m at an average selling price of £225,000. From my lens, that looks rather conservative given the locations of Inland's sites. But even taking a cautious view, the gross profit margin would be 23 per cent to generate a gross profit of £6.2m. And if the company hits its target of 200 sales in the 2014-15 financial year then gross profit will top £10m by my reckoning. On top of this, you can profits from selling on land to other developers.
In the right location
Bearing this escalation in sales, it's well worth noting that Inland's developments are in the buoyant south-east of England housing market and prospects are well underpinned by a number of acquisitions made, including a 40-unit site near St Albans with a gross development value (GDV) of £10.2m; and a new 155-unit scheme on a one-acre brownfield site in Woolwich with a GDV of £32m. Terms have also been agreed on another three sites in Buckinghamshire to build 220 units, and planning permission has been granted for a 101-home scheme on the southern part of St John's Hospital, Chelmsford. The GDV of that scheme alone is £34m.
The latest acquisition, announced this week, of two empty office buildings in Gerards Cross, Buckinghamshire, looks smart, too. These properties are located in one of the wealthiest parts of the UK. In accordance with new legislation brought in by the government in May to promote office to residential conversion, Inland Homes has applied to South Bucks Council under "prior approval notification" procedures to convert the buildings to 30 flats. Construction is set to begin in January and I would expect the flats to sell like hot cakes given the location.
Inland also has a lucrative housing operation at Drayton Garden Village, a joint venture development in West London. Interestingly, Inland's profit share from Drayton Gardens is around 74 per cent, but is expected to rise to 90 per cent by next March. The profit embedded in the development is likely to have risen once you mark holdings to market value and factor in the strong house price growth in London and the south-east this year. Previously, Inland had estimated that future net profits from Drayton Gardens were worth 5p a share, although the risk here is to the upside.
Buoyant land sales
The story gets better when you consider that Inland is enjoying strong demand for land sales to housebuilders. In fact, in the financial year just ended, the company sold 355 plots with planning permission which generated revenues of £15.4m. This excludes the 76 units sold at Drayton Gardens, which brought in a further £5.3m of revenues.
Inland's board has sensibly been replenishing land holdings and, just before the end of June, exchanged contracts on four further sites in deals worth £9m. These add 366 residential plots to take the land bank to around 2,050 plots. The company certainly has the funds to do deals as it had cash balances of £12.2m and net borrowings of only £3.7m at the end of June, having raised £4.9m of new funds through a placing at 27p a share in May to fund the acquisition of more sites for development.
Scope for earnings upgrades
Factoring in the valuable land assets, Inland shares only trade on 1.15 times a net tangible book value of 33p after recognising the 5p a share of net profits from Drayton Gardens. That is a massive discount to the housebuilding sector average of 1.65 times.
Moreover, with profits set to receive another massive lift in the current year to end-June 2014 on the back of increased activity in the housing market, the business is enjoying one heck of a tailwind. That alone justifies the historic PE ratio of 17 based on finnCap's EPS estimate of 2.2p for the 12 months to June 2013. That earnings multiple could easily drop to low double digits in the current financial year as Inland's profits benefit from the compelling mix of rising margins, sales and house prices. In fact, I can see a scenario panning out whereby Inland enters an earnings upgrade cycle to further the underlying momentum.
And that's why I remain positive even though the shares have risen 57 per cent since I first advised buying at 23.5p ('Bargain shares for 2013', 8 February 2013). I would view recent profit-taking as a buying opportunity ahead of next week's results and have upgraded my target price to 45p, equating to a price to tangible book value ratio of 1.35 times. Trading on a bid-offer spread of 37.5p to 38.5p, the shares rate a buy.
Please note that I have written five other articles so far this week on the following companies:
■ Global Energy Developments ('Waiting for pay dirt', 23 September 2013)
■ IQE ('IQE profit taking presents buying opportunity', 23 September 2013)
■ 32Red ('IQE profit taking presents buying opportunity', 23 September 2013)
■ Spark Ventures ('Banking on more cash returns', 24 September 2013)
■ Macau Property Opportunities ('Blue sky territory', 24 September 2013)
■ KBC Advanced Technologies ('Riding an earnings upgrade cycle', 24 September 2013)
Finally, in response to requests from dozens of readers, I have published an article outlining the content of my new book, Stock Picking for Profit: 'Secrets to successful stock picking'
