We've long been fans of Telford Homes (TEF), and believe the east London housebuilder is now set to embark on a new phase of growth by exploiting fast-growing demand from institutional investors for "build-to-rent" properties; effectively eliminating substantial amounts of risk associated with the high working-capital requirements of traditional housebuilding, while still delivering very attractive margins.
- Significant forward order book
- Attractive dividend
- Modest debt levels
- Expanding into build-to-rent
- Inflation could reduce disposable income
- Brexit uncertainty could affect economic growth
Build-to-rent could make up half of all group turnover two to three years from now. The attractions of the business model are significant. Transactions are typically forward funded by the end user, usually a pension fund or similar institution. This means that Telford doesn't have to use its own capital to fund each stage of the development programme. So money can be used elsewhere, which significantly enhances the return on capital.
And the margin sacrifice is not as large as one may assume. Typical gross margins on pure private sales average around 24 per cent, compared with 12-13 per cent on build-to-rent. However, if you take off finance and marketing costs, margins on private sales are nearer 16 per cent, expenses that are not incurred by Telford on a forward-funded contract.
Telford has already completed two such deals, and recently exchanged contracts on the sale of a site in east London to M&G Real Estate. The sale comprises the freehold interest in the land and the construction of 125 open market homes for £48.6m. The site has planning consent for an additional 67 affordable homes which have already been sold to a housing association.
| TELFORD HOMES (TEF) | ||||
|---|---|---|---|---|
| ORD PRICE: | 324.75p | MARKET VALUE: | £244m | |
| TOUCH: | 323-324.75p | 12-MONTH HIGH: | 382p | LOW: 255p |
| FORWARD DIVIDEND YIELD: | 5.0% | FORWARD PE RATIO: | 7 | |
| NET ASSET VALUE: | 251p | NET DEBT: | 17% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 141 | 19.2 | 25.8 | 8.8 |
| 2015 | 174 | 25.1 | 32.6 | 11.1 |
| 2016 | 246 | 32.2 | 38.9 | 14.2 |
| 2017* | 291 | 33.0 | 35.0 | 15.7 |
| 2018* | 355 | 44.0 | 47.1 | 16.1 |
| % change | +22 | +33 | +35 | +3 |
Normal market size: 3,000 Market makers: 8 Beta: 1.23 *Peel Hunt forecasts, adjusted PTP and EPS figures | ||||
The traditional home building side of the business remains extremely busy, and provides Telford with considerable earnings visibility. For the year to March 2017, the forward sold book is already over £700m, and there is a development pipeline worth double that. Demand from a combination of overseas buyers, investors and owner occupiers was highlighted by the off-plan launch of City North in Finsbury Park. A total of 72 homes were sold in just three weekends for a combined value of over £43m. Telford also has no reliance on the government's Help to Buy scheme because purchases using this scheme must be completed within six months, whereas Telford is selling units before construction has even started. Small wonder that it remains on target to generate pre-tax profits of more than £50m by the year ending March 2019, and doubling the size of the business over the next five years. Telford has also been steadily increasing the dividend payment, and this is forecast to yield 5 per cent by 2018.
There are few distinct clouds on the horizon. The referendum vote created ripples for a time, and there is always the fear of higher inflation and slower economic growth.
