In the 12 months to end June 2014, the company reported a 65 per cent increase in pre-tax profits to an all-time high of £8.6m, around £500,000 higher than analyst Duncan Hall at broking house finnCap had predicted only a few months back. Moreover, buoyed by increased activity across the board, finnCap has raised its 2015 pre-tax profit estimate by £2m to £12m on revenues of £88.9m, up from £39.8m in fiscal 2014, and introduced a “potentially conservative estimate, given the ramp-up house-building activity, of £14m for 2016”.
On this basis, expect EPS to rise to 4.7p for the 12 months to June 2015, up from 2.87p in the financial year just ended and 1.98p in fiscal 2013. Mr Hall is pencilling in EPS of 5.5p for the year to June 2016, implying a doubling of post tax earnings per share over the next two financial years. He also anticipates further growth in the dividend too. The board have just announced a 122 per cent hike in the payout to 0.6p a share and finnCap’s forecast is for a 50 per cent rise in the payout to 0.9p in the current financial year, rising to 1p a share in fiscal 2015. On this basis, the prospective yield is almost 2 per cent. The final payout could be conceivably more because with output ramping up, current net borrowings of £28.8m are expected to fall sharply. Gearing is 45 per cent of shareholder funds of £64m.
Conservative forecasts
It’s also my view that even those newly upgraded forecasts could yet prove too conservative. That’s because Inland already boasts strong forward sales of £54.7m, or 1.4 times last year’s total revenue, and has 436 homes under construction to deliver 270 units in the year to end June 2015. But with market conditions buoyant, and demand for housing in the company’s south and south east heartland increasing, there is potential for not only higher selling prices (and better margins on sales), but bumper gains on land parcel disposals to housebuilders looking to replenish their own land banks.
In fact, Inland now has a record 3,734 plots in its land bank, of which 1,316 had planning permission at the end of June. It’s worth noting that the company’s land portfolio includes six long-term strategic sites offering a potential 620 plots and which have been secured at a discount to their open market value indicating a conservative land buying policy.
Sites of interest include two developments of 152 apartments each. One is at Callis Yard in Woolwich, London opposite a new Crossrail station and close to the town centre, and the other is at West Plaza, Ashford in Middlesex. Of the 270 completions scheduled for the year to June 2015, expect around 120 units from West Plaza alone. With 90 per cent of the apartments at West Plaza already contracted for sale, then there is clear visibility on revenues to generate the aforementioned profit surge. Furthermore, given the schedule of completions it also means that Inland is set for a very strong first half of the current financial year and one that will make for a bumper set of results in the first quarter next year.
It is also clear to me that sales at Drayton Gardens Village in west London are performing significantly better than expected and – fee income received from the venture in which Inland has a majority interest – more than doubled to £6.6m in the financial year.
Hidden value in the land bank
The ramp up in earnings aside, the investment case is well underpinned by the hidden value in Inland’s land bank, and prospects for even more gains in the future. Chief executive Stephen Wicks is aiming to raise the land bank to 5,000 plots in order to increase output to 500 plots a year. Currently, the 1,675 plots owned or contracted with planning consent have a book value of £26,000 each in the company’s accounts, or a total of £109m. But analysts believe the open market value of these plots is nearer £65,000, implying an uplift of £65m or the equivalent of 32p a share.
Furthermore, this ignores the development profit per plot – as much as £20,000 for each unit – and any upside from the controlled land bank of 2,000 plots. Last year, Inland reported an operating margin of 26 per cent and a gross profit margin of 40 per cent, highlighting the profit potential inherent in the land bank.
In other words, Inland’s reported net asset value of £64m, or 32p a share, woefully underestimates the true value in the company. So with current trading buoyant, the development pipeline strong, and analysts upgrading earnings estimates, I have no hesitation reiterating my 60p target price (‘Home in on a small cap profit surge’, 4 August 2014). Please note that I included Inland as one of 2013 Bargain shares (‘How the 2013 Bargain shares fared, 7 February 2014), since when the price has doubled from 23.5p to 47p.
Target price
Offering a further 30 per cent potential share price upside to what could be my conservative price target of 60p – finnCap upgraded its target price from 60p to 70p post today’s results, inline with that of analyst Nick Spoliar at brokerage W.H. Ireland – Inland shares are also well supported by a favourable technical set-up.
Namely, the 14-day relative strength indicator is showing a neutral reading around 50, so offering a platform for rally; the share price has found strong support from the 200-day moving average, a positive sign; and after a 11-month sideways move which has capped progress in the 50p to 52p area, the bullish upmove today on the daily candlestick chart would indicate to me that another attempt at a break-out is firmly on the cards.
It’s also one that I firmly expect to succeed, and trading on a bid offer spread of 46.5p to 47p, I rate Inland shares a very strong buy and have a year-end target price of 60p.
■ Simon Thompson's new 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 stock-picking'
