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Taking Q1 profits and running gains

Taking Q1 profits and running gains
April 4, 2017
Taking Q1 profits and running gains

We can now make that 32 times as the average share price gain on the 10 companies I highlighted is 13.9 per cent in the past 13 weeks, or almost 11 percentage points better than a FTSE All-Share tracker. As this was only meant to be a short-term trade, and given I now feel that after this outperformance the sector is more likely to trade in line with the general market, I am banking the healthy profit.

That said, I am not bailing out of the sector entirely as I am maintaining an interest in all three special situations I mentioned at the tail end of last year ('Built for gains', 19 December 2016): East London housebuilder Telford Homes (TEF:369p), specialist housebuilder and brownfield land developer Inland Homes (INL:61p) and Urban&Civic (UANC:239.5p), a listed property group specialising in strategic residential land developments. I have good reason to remain positive on all three.

Telford Homes continues to de-risk its development pipeline, having just sold off the first phase of 112 of the 297 open-market homes at New Garden Quarter, Stratford, east London to Folio London, a subsidiary of Notting Hill Housing Group, its joint venture partner in the development. This is Telford's fourth build-to-rent transaction in the past 12 months and has been made on a forward-funded basis comprising an initial upfront payment followed by regular payments throughout the remaining construction period. The total net cash consideration is £53.7m and means the joint venture will no longer require any external debt finance for the development. This not only saves anticipated funding costs, but reduces Telford's longer-term gearing requirements, too. The remaining open-market units, which form the second phase, are expected to complete in 2019 and will be launched at a later stage. The joint venture has already sold off all of the 174 subsidised affordable homes to Notting Hill Housing Group in a separate transaction.

Moreover, chief executive Jon Di-Stefano says that his company is actively looking for appropriate opportunities to increase the proportion of build-to-rent homes, suggesting that more deals like New Garden Quarter are being considered. The point being that the significant de-risking of the pipeline and the debt required to fund it is not being reflected in a rating of 10 times earnings for the financial year to end March 2017, and a price-to-book value of 1.4 times. A prospective dividend yield of 4.4 per cent offers a decent income stream, too.

So, ahead of the forthcoming full-year results on Wednesday, 31 May, I feel there is a chance that the 375p initial target price I outlined when initiated coverage at 289p ('London property trading play', 22 August 2016) will be achieved, and possibly exceeded. Run profits.

 

FTSE 350 Housebuilders share price performance

CompanyPrice on 3 Jan 2017 (p)Price on 4 Apr 2017 (p)Percentage change (%)
Taylor Wimpey15619323.7
Redrow42751219.9
Crest Nicholson45654118.6
Persimmon1,7682,08417.9
Barratt46654817.6
Galliford Try1,2911,46613.6
Berkeley2,8083,17713.1
Bellway2,4532,71310.6
Bovis8208503.7
Countryside Properties2412410.0
Average13.9
Deutsche Bank FTSE All-share tracker (XASX)404.54173.1

 

Admittedly, Inland has missed out on the first-quarter sector rally, although its share price is still 165 per cent up since I initiated coverage at 23p in my 2013 Bargain Shares portfolio ('How the 2013 Bargain Shares fared, 7 February 2014). The key to making up the lost ground will be for the company to deliver the second-half weighting to profits to make up for a soft first-half performance that was held back by the timing of lumpy land sales.

The fact that the board raised the first-half dividend by a quarter to 0.5p a share is a good sign of their confidence in achieving the 25 per cent increase in underlying EPS to 6.8p in the 12 months to end-June 2017, as analysts John Cahill and Miranda Cockburn at brokerage Stifel predict. I would also flag up that the housebuilding arm's forward order book is 52 per cent ahead of the same period last year, another reason for the directors' confidence. Priced a third below net asset value (NAV), rated on a single-digit earnings multiple and offering a 2.5 per cent forward dividend yield, I feel the valuation remains attractive and my 80p target price is not out of place. Buy.

Shares in Urban & Civic have risen by 11 per cent since my December article, so slightly lagging the gains of the FTSE 350 housebuilders, and look undervalued on a 28 per cent discount to analysts' EPRA NAV estimates of between 324p and 332p a share. The company reports interim results on Thursday, 25 May and I anticipate further valuation upside on the unserviced residential EPRA plot values at the company's 1,432 acre freehold site at Alconbury Weald, incorporating Cambridgeshire's Enterprise Zone with permission for 5,000 homes; and the 1,170 acre site in Rugby where permission has been granted for 6,200 new homes.

Chartered surveyors last valued the two developments at £105m and £197m, respectively, so they account for three-quarters of the company's book value. However, these valuations are based on average blended plot values of £24,500 and £15,000, respectively - well below the levels of recent sales. The 'hidden' value in the balance sheet is highly supportive of analysts' expectations of mid-teens NAV per share growth in the financial year to end-September 2017 and I remain a buyer ahead of the forthcoming half-year results.

 

Primed for an earnings beat

Aim-traded property fund manager and investor First Property (FPO:50p) will be issuing a pre-close trading update for the 12 months to end March 2017 in the near future and it's going to make for a cracking read. Analyst Chris Thomas at broker Arden Partners is pencilling in a rise in adjusted pre-tax profits from £7.7m to £9.2m to produce EPS of 5.6p, but I expect upgrades for a number of reasons.

Firstly, the company owns a portfolio of 11 high-yielding commercial properties in Poland and Romania worth £170m and yielding around 9.8 per cent, the recurring profit from which accounts for a large chunk of Arden's forecast. Bearing this in mind, Mr Thomas has factored in an average sterling:euro exchange rate of £1=€1.217 when converting these overseas earnings, well above the average rate of £1=€1.19 for the 12-month trading period and the current spot rate of £1=€1:17.

Secondly, First Property has just sold off a Romanian warehouse property for €3.2m (£2.7m), or €1m above book value, which will result in a profit of €600,000 after staff profit share. This is not factored in to Arden's profit estimate.

Thirdly, factoring in the net profits earned in the second half, and the fall in sterling, I reckon First Property's EPRA NAV will have risen from 43p a year ago to around 49p at the March 2017 year-end.

Fourthly, expectations of pre-tax profits and EPS rising to £9.7m and 6.3p, respectively, in the 12 months to end March 2018 are based on a cross rate of £1=€1.217, or more than 4¢ above the current spot rate. Or put it another way, First Property's overseas earnings are now a lot more valuable in sterling terms than investors possibly realise, a fact not reflected in a share price trading in line with my estimate of spot book value, on eight times conservative looking earnings estimates, and underpinned by a 3.1 per cent prospective dividend yield.

So, having first recommended buying First Property's shares at 18.5p in my 2011 Bargain Shares portfolio, and booked dividends of 7.265p a share since then, I feel that my 56p target price is not only achievable, but likely to be surpassed. Buy.

 

Juridica disappoints

Finally, shares in Juridica Investments (JIL:14p), a company in the process of winding down its portfolio of corporate litigation investments in the US and returning cash to shareholders, fell 18 per cent post full-year results, which were dogged by further asset impairment charges. I included the shares at 41.2p in my 2016 Bargain Shares portfolio, since when the company returned 40p a share of cash to shareholders. I last rated them a hold at 20p when I updated my portfolio in early February. However, the hefty fall in Juridica's net asset value from $38.8m to $28m in the second half of last year, after stripping out $47m of dividends paid, has reduced book value per share to just over 20p and weakened the investment case. In the circumstances, I would sell the balance of your holdings.

 

MORE FROM SIMON THOMPSON...

A comprehensive list of all the investment columns I have written in 2017 is available here.

The archive of all the share recommendations I made in 2016 is available here

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com for £14.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stock picking