However, to try to mitigate risk I do attempt to follow some guidelines as highlighted by my recent coverage on buy-to-let lender Paragon (PAG: 365p – ‘Riding the buy-to-let boom’, 27 October October 2014) and small cap defence company Cohort (245p – ‘Blue sky buy’, 6 October 2014), both of which were on the cusp of signalling strong share price break-outs when I initiated coverage. Another example is specialist housebuilder and brownfield land developer Inland Homes (INL: 52.75p) which has been knocking on a glass ceiling of 50p all year and finally pushed through this major overhead resistance last week. I made a strong case that this would happen (‘Break-out-looms for small cap winner’, 29 September 2014).
Purely from a technical perspective, if the 55p level can now be taken out – a significant high dating back to the autumn bull market of 2007 – then the post Aim-listing spring all-time high of 62p is the next realistic target. This neatly coincides with my 60p long standing target price. Realistically that could prove too conservative given the real momentum and potential for value creation in the business. Indeed, the company’s latest land deal, and one announced at the tail end of last week, will see Inland develop the 8.9 acre Chapel Riverside site in Southampton in a joint partnership with the site’s owner, Southampton City Council. This is the second site Inland is developing in the city, having acquired a seven acre site that was the former Meridian television studios in May this year.
The Chapel Riverside project has a development value in excess of £70m for the creation of 350 homes and 6,500 square metres of commercial space subject to planning consent. A planning application will be submitted in the second half of next year. Southampton City Council will retain ownership of the land, so don’t expect Inland to earn the same profit share percentage terms that the company enjoys on its Drayton Garden Village project in west London, or on its Wilton Park project in Beaconsfield. But it is lower risk as the capital tied up in the project is far less.
Furthermore, even if Inland only manages to replicate the 27.5 per cent gross margin made from its open market completions last financial year, the profit uplift could be substantial given the scale of the Chapel Riverside development. Interestingly, there is potential for Inland to pursue other similar structured deals in the future as analyst Duncan Hall at finnCap points out: “This is another example of how Inland can use its development expertise to lock into future earnings and employ a funding model clearly attractive to public authority land-owners, which could be replicated.”
Low rating drives re-rating
In the circumstances, it’s hardly surprising that the shares have burst through the 50p glass ceiling as they are hardly highly rated for their projected earnings growth profile. To put this into perspective, Mr Hall predicts EPS will rise to 4.7p for the 12 months to June 2015, up from 2.87p in the prior financial year and 1.98p in fiscal 2013. And without factoring in any contribution from the Chapel Riverside project, 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. On this basis, the shares are priced on a forward PE ratio of less than 10 for the 2015/16 fiscal year.
On a price-to-book value basis, Inland’s equity is being valued on 1.67 times historic net asset value, but if land were marked to open market value then the company’s equity is trading far nearer book value. That’s because Inland has a record 3,734 plots in its land bank, of which 1,316 has planning permission and the rest is being brought through the value enhancing planning process. Indeed, its land portfolio includes a potential bank of 620 plots across six long-term strategic sites that have been secured at a discount to their open market value.
And if a low price-to-book value and modest earnings multiple are not compelling enough reasons to buy Inland shares, then there is scope for the board to step up its progressive dividend policy. Having more than doubled the payout to 0.6p a share in the last financial year, finnCap forecasts a 50 per cent rise to 0.9p a share in the financial year to June 2015, increasing to 1p a share in fiscal 2016. On this basis, the prospective yield is 1.7 per cent.
Add to that a benign environment for house price growth in the regions, buoyed by low unemployment and record low mortgage rates, and prospects look very attractive for the business. In fact, to reflect the profit upside from the Chapel Riverside project, I have raised my conservative target price to 70p, in line with both finnCap and W.H. Ireland. Needless to say, I continue to rate Inland shares a strong buy on a bid-offer spread of 52.5p to 52.75p. Please note that I included Inland as one of my 2013 Bargain shares at 23.5p (‘How the 2013 Bargain shares fared, 7 February 2014).
Please note that I have published 38 investment columns since the start of last month, including three today, all of which are available on my IC homepage...
■ 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'
