Gold-winning performance

It's a trip well worth taking for property investors, too, because you get a bird's-eye view of the new residential development taking place in the East End and the regeneration area around the Olympic Park. That's of interest to me, because in February I included shares in east London housebuilder Telford Homes (TEF) in my annual Bargain Shares portfolio ('Bargain shares', 10 Feb 2012). I also reiterated the advice three months ago ('Great value special situations', 16 Jul 2012), as I firmly believed the trading performance of the company had yet to be fully factored into its market valuation.

My positive stance has been fully vindicated because in a pre-close trading statement ahead of the release of half-year results on 28 November, Telford has turned in an Olympic-winning performance, having sold an eye-catching 85 per cent of its targeted completions for the financial year to 31 March 2013. In fact, first-half sales more than doubled to 252 units in the six months to 30 September 2012 and, with margins up considerably, we are guaranteed a spectacular set of results in four weeks' time. It also means that analysts' full-year estimates are in the bag as Telford now only needs to sell another 42 homes in the second half to hit Shore Capital's full-year pre-tax profit estimate of £8m to produce EPS of 11.8p. To put that into perspective, Telford made pre-tax profits of £3m in the financial year to 31 March 2012, split equally between the first and second halves, so in the latest six-month trading period, the company will have made more than double the profit it reported for the whole of the previous financial year.

The news gets even better because Telford has also secured a further 218 sales on its developments in the past six months, mainly driven by demand from overseas investors attracted by the decent rental yields on offer - as much as 6 per cent on some units; high tenant demand; and the safe haven status of London property in these uncertain times. The company is also seeing decent demand from UK owner-occupiers and notes that many buyers are getting financial assistance from family members to get onto the property ladder. As a result, profits for the financial year to March 2014 are now expected to exceed market forecasts, which means Shore Capital will have to upgrade its previous pre-tax profit and EPS estimates of £10m and 14.9p, respectively. Analysts are currently working on their numbers as we go to press, but what is clear is that Telford's profits could easily rise by 30-35 per cent in the 12 months to March 2014 given the positive dynamics driving demand.

How Simon Thompson's 2012 Bargain Shares Portfolio has performed

So, although the shares have already surged over 50 per cent from 91.7p to 140p on an offer-to-bid basis since I advised buying in mid-February, they still only trade on less than 10 times March 2014 earnings estimates and that's before Shore Capital upgrades its estimates, which it is due to do soon. And, with net borrowings only £31.9m at the end of September, well within banking facilities of £90m, balance sheet gearing is also very comfortable at less than 50 per cent. This not only means that there is scope for Telford to continue to acquire new sites - the current development pipeline is worth £125m of gross profit, or five times the £25m gross profit the company is expected to make in the current financial year - it also means that there is scope for a sharp rise in the dividend. Currently, Shore Capital is predicting that the payout will be raised from 3p to 4p a share in the 12 months to March 2013, rising again to 5p a share the year after. On this basis, the forward dividend yield is 2.9 per cent, increasing to a healthy 3.5 per cent the year after.

For good measure, Telford's current market value of £67m is bang in line with its March 2012 reported net asset value of £66.2m and is less than Shore Capital's March 2013 net asset value (NAV) estimate of £70.5m, equivalent to 142p a share. Moreover, even without taking in consideration those imminent broker upgrades, the shares are trading well below March 2014 NAV estimates of 153p. In my opinion, that figure is looking increasingly conservative because, if Telford can maintain the strong sales momentum - and you wouldn't bet against it - further earnings upgrades are likely in the next six months, which in turn will boost the company's prospective book value.

In these circumstances, I am upgrading my fair value target price to 170p a share, which equates to a modest 11 times prospective earnings in the financial year to March 2014, and that's before Shore Capital upgrade its current estimates shortly. Buy.

SEE MORE SIMON THOMPSON ARTICLES ONLINE:

A compelling benefit of digital publishing is the ability to react in real-time to events and quickly inform subscribers of what can be very price-sensitive and valuable information. Last Friday was a case in point when I noticed some very interesting trading activity in two companies, IQE (IQE) and Communisis (CMS). This prompted me to publish two trading articles on our website and simultaneously alert our customer base to these potentially profitable investment opportunities through our daily email service. If you missed out on these articles and would like to upgrade your magazine subscription, you can add full online access to an existing print subscription for just £20 a year - an amount you could feasibly make back in a day. A standalone online subscription is £115 a year. For more details, see our product matrix or call 0844 848 0106.