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OPINION

Decision time

Decision time
April 16, 2015
Decision time

That represents a 200 per cent gain on my recommended buy-in price of 23p in February 2013. I also published a bullish update ahead of the financial results when the share price was 57.5p ('A fluid performance', 2 February 2015), and subsequently re-iterated that advice in early March when the price was around 65p (‘Housebuilders: Trading bumper gains’, 9 March 2015).

Do the maths

The question I have to ask myself now is whether there is enough share price upside left to warrant maintaining a financial interest. Analyst Nick Spoliar at broking house W.H. Ireland certainly thinks so as he has a target price of 80p and a sum-of-the-parts valuation of 100p a share. Analyst Duncan Hall at brokerage finnCap has a 70p target price and a hold recommendation on the shares. Based on Mr Hall’s estimates Inland is on course to more than double revenues to £89m in the financial year to end June 2015 and lift pre-tax profits by 40 per cent from £8.6m to £12m. On this basis, expect EPS to jump by almost 75 per cent to 4.7p, helped by a lower tax charge, to underpin a 50 per cent rise in the dividend to 0.9p a share.

Those forecasts look solid as Inland has just reported a 68 per cent increase in pre-tax profits to £6.1m in the six months to end December 2014, or half the forecast full-year outcome. This performance was buoyed by a quadrupling in new build sales to just shy of 200 units in the company’s housebuilding business. Moreover, with 199 completions already booked in the fiscal year, Inland looks likely to beat Mr Hall’s full-year forecast of 270 units.

The one fly in the ointment is the uncertainty on the timing of land sales caused by the forthcoming general election. That’s because even if Inland hits finnCap’s revenue estimate of £63m (based on 270 completions), then the company still needs to make some substantial land sales to achieve the £89m full-year revenue estimate. No realisations were made in the first half, and though there should be some material sales in the current quarter, predicting the exact timing is difficult.

Still, that should not detract from the long-term investment case. Buoyed by a record land bank of over 4,500 plots, and with all the political parties recognising that the UK has a serious housing shortage, Inland is undoubtedly well placed to continue to realise the hidden value from its land holdings while at the same time ramping up its housebuilding operation. That’s the main reason why analysts at W.H. Ireland calculate the company has a sum-on-the-parts valuation of 100p a share.

Developments with bumper profit potential

For instance, consider the value in Inland’s flagship development project at the former MoD site at Wilton Park in Beaconsfield, Buckinghamshire. This site was acquired for £35m last year including deferred consideration of £29m to be paid over the next three years. A planning application is being submitted for a development of 350 homes, and should be approved after the Development Brief was adopted by the South Bucks District Council at the end of March. This is prime real estate with houses in the area amongst the priciest in the UK outside London. Indeed, based on a gross development value of £300m, the average price per unit is around £860,000 per home, so there should be bumper profits to me made. Using a 25 per cent gross margin and an 80 per cent profit share implies a post-tax profit of around £47m for Inland, or the equivalent of 23p per Inland share.

Excluding Wilton Park and other joint ventures, analysts estimate that the open market value for the company’s 1,656 plots of owned land is in excess of £80,000 a plot, or more than double the implied carrying value in the company’s latest accounts. The difference between book value and open market value on these land holdings alone is around £70m, a sum worth 35p per Inland share. It’s not difficult to make a case that once you mark all the company’s land holdings to market value, including the value tied up in land under option, then Inland’s true net asset value per share could be easily be treble the 33.3p figure in the latest accounts.

Potential bid target

It’s not beyond the realms of possibility either that the UK’s largest homebuilders may be tempted to swoop on Inland as an easy way of getting their hands on a valuable land bank located in prosperous southern England. It’s highly unlikely that I am the only one doing the above calculations. And with Inalnd’s top six shareholders owning 34.6 per cent of the issued share capital, including founder Stephen Wicks who has an 8 per cent shareholding, then surely any take-out price would have to be close to the 100p sum-of-the-parts valuation. Importantly, the company is well funded: net debt of £28.8m, including zero dividend preference shares of £12m, represents 42 per cent of shareholders funds.

Admittedly, I am not banking on a takeover at this stage, but I still feel that the hidden value inherent in Inland’s land bank is yet to be properly reflected in its market capitalisation even after applying a small cap liquidity discount. In fact, applying a 20 per cent discount to sum-of-the-parts valuations implies a share price closer to 80p, or almost 25 per cent above the current level. The shares are reasonably priced on an earnings-based valuation too: the company’s current market capitalisation of £134m equates to 12 times its fiscal 2016 post-tax profit estimates.

I would also point out that although Inland’s agreement with Christian Candy's CPC Group - to jointly fund the acquisition of brownfield sites with the potential for residential or mixed-use development across the South-East of England – has promise, it has no implications on the above profit and net asset value estimates as the planning process has only just started on the joint venture’s first project in High Wycombe. I would also point out that the press comment earlier this week in our sister publication The Financial Times, referred to Candy & Candy Holdings, one of Nick and Christian Candy’s companies, and not CPC Group, Inland’s joint venture partner.

So after taking into full consideration the possibility of Inland realising substantial value for shareholders from future land sales, and increasing profits from house building in what remains a benign environment, I feel the shares are well worth holding onto at the current price. True, the forthcoming election increases uncertainty short-term, but I would still run your bumper profits with a view of achieving my upgraded year-end target price of around 80p.

Director share buying at Walker Crips

The insiders at Walker Crips (WCW: 45p), a financial services group with activities covering stockbroking, investment and wealth management services, clearly believe the company is heading in the right direction.

Managing director Sean Kin Wai Lam has splashed out £95,000 purchasing 221,000 shares at 43p each at the end of last month to almost double his stake in the company and now controls 1.1 per cent of the share capital. Non-executive director Lim Hua Min also got into the act by acquiring the same number of shares through members of his family who constitute a concert party for disclosure purposes. The total holding of Mr Min and connected parties to him is 9.08m shares, representing 24.2 per cent of Walker Crips’ share capital.

It’s easy to see why the insiders are bullish. After factoring in the contribution from the acquisition of a private wealth management firm last month, a deal I commented on last month (‘A six shooter of small cap buys’, 10 March 2015), I reckon the £16m market cap company should be able to produce a pre-tax profit in the region of £1m for the March 2016 fiscal year, or 50 per cent higher than my profit forecast for the March 2015 fiscal year. And with pro-forma net funds of £5.8m (worth 15p a share), expect more bolt-on deals too as the board strives to drive assets under management and administration up from £3.5bn now to a group target of £5bn. Add to that a rolling 12-month dividend yield of 3.5 per cent, and the directors lead is worth following.

Please note that this is a small cap company, so it’s sensible to deal in smaller bargain sizes to avoid market makers raising their offer price above the quoted spread to fill a large trade.

Losses narrow at SRT

As anticipated the pre-close trading update from Aim-traded Software Radio Technology (SRT: 32p), a small cap provider of maritime domain awareness technologies, revealed a narrowing of losses in the financial year to end March 2015. Revenues increased from £6.1m to £8.5m in the 12-month period and pre-tax losses fell from £1.5m to £400,000. The company ended the year with net funds of £2.1m.

Having initiated coverage on the shares only six weeks ago at the current price (‘On the radar’, 3 March 2015), I still maintain that they rate a speculative buy. My target price range of 40p to 43p is based on Software Radio converting its significant sales opportunities into firm contracts and then delivering on them. Analysts conservatively forecast a small profit on revenues of £10m in the fiscal year to March 2016, but these estimates could be quite literally torpedoed out of the water if the company lands just one of the 21 fleet-monitoring project and mandate sales opportunities worth a potential of £200m in revenues as I outlined in last month’s article. That’s because the company has reached an inflection point whereby incremental sales will have an accelerated impact on profitability due to the operational gearing of the business.

So in advance of potential contract announcements, and full-year results scheduled for Tuesday, 9 June, I continue to rate Software Radio’s shares a speculative buy on a bid-offer spread of 30.5p to 32p.

■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'