Shareholders will not have been disappointed by the company's fiscal 2015 results release, either. Factoring in a revaluation gain of £14.5m on 76 homes held for rent at the company's site at Wilton Park, Beaconsfield in Buckinghamshire, and which should generate annual rental income in excess of £1m, Inland's pre-tax profit soared from £9.6m to £34m on revenue up 94 per cent to £114m in the 12 months to the end of June 2015. Analyst Duncan Hall at broking house finnCap had predicted full-year revenue of £98m and pre-tax profit to £15m in the 12-month period so, excluding valuation gains, the company beat expectations easily. The two-thirds rise in the payout to 1p a share was well ahead of the 0.9p a share forecast, too.
Interestingly, the Wilton Park rental properties are now in the books for £26m, or just shy of £350,000 each and the land at Wilton Park has capacity for 300 new homes with a gross development value of £250m, or around £833,000 each, and is the company's 'jewel in the crown'. That's well worth noting because the major part of Inland's land bank is held as inventories at the lower of cost and net realisable value, but the unrealised value within the portfolio of sites is significantly higher than the stated value. As a result, the IFRS net asset value (NAV) figure of 43.9p in the accounts significantly understates the true value of inventories, of which £90m is land, and £31m is housebuilding stocks.
Accounting change significant
So, to address this issue, and after consultation with its advisers, Inland's board has decided to adopt the EPRA NAV measure, which highlights the fair value of net assets on a long-term, ongoing basis. While not recognising unrealised gains due to planning gains in the income statement, the adjusted value of trading assets and land subject to planning gains would reflect their current fair value under EPRA's NAV measure. The company will adopt this change in accounting practice when it produces its half-year results in March 2016. We can realistically expect a massive increase in book value per share as Inland owns 1,086 plots outright with consent, a further 1,344 plots without consent, with the balance of 2,642 plots in the process of going through the planning process either in joint ventures or under option.
To put this into some perspective, the aforementioned 2,430 owned plots have a book value of £90.5m on Inland's balance sheet, implying a value for each plot of £37,000 against prevailing market prices of between £60,000 and £100,000, according to analyst Duncan Hall at broker finnCap. Moreover, having acquired the Beaconsfield site for £35m, of which the 76 homes let out were acquired for £151,000 each or a total of £11.5m (they now have a market value of £26m), this means that the 300 plots of land on the site has an implied book value of £78,000 each, or a total of £23.5m. But clearly if each home has a gross development value of £800,000, then the plot itself simply has to be worth £200,000. In other words, I believe that there is £36m of hidden value in the Beaconsfield site alone, being the difference between the £60m open market value of the 300 plots, and the £23.5m carrying value in the accounts. That's a chunky sum for a company with a market capitalisation of £147m and represents an uplift of 18p a share on the IFRS NAV figure of 43.9p in the latest set of accounts.
And, of course, the Beaconsfield land only accounts for a quarter of the £90m land bank, so expect further gains in other land holdings, too, when they are valued on an EPRA accounting basis. Some analysts have a sum-of-the-parts valuation of 100p a share on the equity after marking land to market value, and I don't think that's an unreasonable valuation to make.
The year ahead
Admittedly, the thumping valuation gains aside, it looks like the company will have to produce record sales again of its brownfield land for underlying profits to make further progress in the new financial year. That's because Inland sold 440 building plots last year for £39.6m and accounted for £12.2m of pre-tax profit, whereas the 248 private homes it sold generated pre-tax profit of £11.2m on revenue of £66m. Bearing this in mind, Inland currently has forward home sales of £31.1m, so even if it managed to sell a similar number of homes, then it will still need to offload between 300 and 500 plots from the land bank, depending on location, to match the profit it achieved on brownfield land sales in the last fiscal year.
That's not beyond the realms of possibility with the housing market strong, and given the location of Inland's sites. Excluding valuation gains, market expectations are for current year pre-tax profit of £16m, according to finnCap.
In the circumstances, and as we are only weeks off entering the seasonally strong period for housebuilder's shares, I would continue to run your 210 per cent paper gains ahead of Inland's half-year trading update in mid-February. I last recommended running profits when the price was 71p ('Bumper cash returns', 13 Aug 2015) and maintain my initial target price of 80p, and a potential break-up value of 100p a share. On a bid-offer spread of 72p to 72p, I would run profits.
Please note that I have written two other columns today, both of which are included in the list below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past two weeks:
■ MS International: Buy at 180p, initial target price 240p ('Making waves', 19 October 2015)
■ Pure Wafer: Buy at 175p, new target 200p ('Valuation anomaly worth exploiting', 20 October 2015)
■ Greenko: Hold at 87p, new target 100p ('Greenko's cash return', 20 October 2015)
■ Elegant Hotels: Buy at 108p, target range 130p to 135p ('An elegant investment', 20 October 2015)
■ BP Marsh & Partners: Buy at 157p, target 180p ('Cash-rich value play', 21 October 2015)
■ Crystal Amber: Buy at 170p; Dart Group: three month trading buy at 468p; Grainger: three month trading buy at 247p; Leaf Clean Energy: await news on Invenergy asset sale ('A quadruple play', 22 October 2015)
■ UTV Media: Buy at 184.5p, target 215p ('On the right wavelength', 26 October 2015)
■ Globo: shares suspended at 28p ('Globo bombshells', 26 October 2015)
■ Globo: shares suspended at 28p ('The truth about Globo', 29 October 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, initial target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ 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'
