The first tip is that in a bull market the whole point is to be long. Not investing and waiting on the sidelines is a position in itself and is only worthwhile if you believe you can time the market to perfection. Some investors can, and regularly do, but the vast majority fail miserably. Fund managers are no better at all. That's well worth considering if you are dealing in and out of the market, especially when it is in a strong uptrend, as you always run the risk of being left behind by dealing out at the wrong time with a view to buying in much cheaper. So, in effect you are forsaking the upside of potentially significant profits for the sake of making a few per cent on the turn. That may suit some investors, but not me.
Remember the trend is meant to be your friend, so use it. A far better strategy is to use minor corrections to buy into an established uptrend especially as the final stages of a bull run have a tendency to generate easy gains as latecomers come to the party, so ride your profits. It can also pay to average up by using a minor correction to top up your holding in a company at a higher price than your initial investment, but at a lower price than the previous high point. Clearly, never overexpose yourself to any one investment, but the merit of this strategy is that you are running with your winning trades and exiting your losers when they fail to deliver.
Admittedly, this takes a disciplined approach and biding your time. However, patience is a virtue and having researched a company and made the decision to invest, you simply have to be disciplined when it comes to investing and always set a limit on the price you are willing to pay. The investment case may be attractive at one level, but potential future returns rapidly diminish if the price has run away by the time you come to buy. So only invest when the share price is in line with your pre-set limits. Otherwise move on. That piece of advice is timely right now because shares in both Inland and Terrace Hill have retreated to levels at which I believe the future returns embedded in the share price are attractive on a risk-reward basis.
A buying opportunity
Shares in Inland (INL: 39.25p) have retreated by around 10 per cent from their September high of 44p and now offer over 20 per cent upside to my upgraded target price of 48p ('A buying opportunity ahead of the results', 25 Sep 2013). That's attractive to me and also to Duncan Hall, an analyst at broker finnCap, who has just upgraded his target price on the shares by an eye-catching 50 per cent to 60p. He has every reason to upgrade his fair value estimate too.
That's because Inland is ramping up its housebuilding operation just as the housing market recovery is gathering steam, which should underpin a very sharp rise in profits. In fact, the government is doing everything to make sure that the feel-good factor of rising house prices will be spread countrywide by the time the next election in May 2015. That gives us 18 months of a potential good news story to rise on the coat-tails of.
The tailwind of the government's Help to Buy mortgage guarantee scheme, the Bank of England's Funding for Lending operations and the benign monetary policy of the Bank of England means that borrowers can realistically expect the low interest rate environment to stay for the next couple of years at least. This can only boost the confidence of homebuyers, support transaction levels and drive house prices higher given the supply-demand imbalance in the market. And if that was not attractive enough, Inland is operating in a sweet spot by targeting the £160,000 to £400,000 range of selling prices, so it is best-placed to reap the greatest upside.
The figures speak for themselves. In the financial year to the end of June 2013, Inland reported a five-fold rise in revenues to £31m, which more than trebled pre-tax profits from £1.6m to £5.2m. That was 30 per cent more than analysts had expected a little over 10 weeks ago and meant that net earnings more than quadrupled to 2p a share. Total completions surged from nine to 55 units in the 12-month period and finnCap predicts output will ramp up to 140 units in the current financial year, rising to 240 homes in 2014-15.
Factoring in likely sale prices this means that Inland's housebuilding activities are set to soar from £11.4m to £26.5m in the 12 months to June 2014. And based on a gross margin of 21.5 per cent, operating profits will ratchet up from £2.4m to £5.7m. It could be even more if sale prices rise with the market. Moreover, by the time Inland is selling 235 homes in the 2014-15 financial year the company could be generating revenue of £57.6m and profits of £12.4m solely from housebuilding. Those forecasts are not pie in the sky, either, once you consider that Inland currently has forward sales of £46.3m secured and has 486 units under construction, in fact they are hardly overambitious. It also has a very attractive development pipeline.
Location, location, location
Inland's developments are in the buoyant south-east of England housing market and prospects here are well underpinned by a number of acquisitions made, including a 40-unit site near St Albans with a gross development value (GDV) of £10.2m; and a new 155-unit scheme on a one-acre brownfield site in Woolwich with a GDV of £32m. Terms have also been agreed on another three sites in Buckinghamshire to build 220 units, and planning permission has been granted for a 101-home scheme on the southern part of St John's Hospital, Chelmsford. The GDV of that scheme alone is £34m.
The latest acquisition, announced a matter of weeks ago, of two empty office buildings in Gerrards Cross, Buckinghamshire, looks smart, too. These properties are located in one of the wealthiest parts of the UK. In accordance with new legislation brought in by the government in May to promote office to residential conversion, Inland Homes has applied to South Bucks Council under "prior approval notification" procedures to convert the buildings to 30 flats. Construction is set to begin in January and I would expect the flats to sell like hot cakes given the location.
Inland also has a lucrative housing operation at Drayton Garden Village, a joint-venture development in West London. Interestingly, Inland's profit share from Drayton Gardens is around 74 per cent, but is expected to rise to 90 per cent by March 2014. The profit embedded in the development is likely to have risen once you mark holdings to market value and factor in the strong house price growth in London and the south-east this year. Previously, Inland had estimated that future net profits from Drayton Gardens were worth 5p a share, although the risk here is to the upside.
Valuable land bank
There is also hidden value in the company's land bank of 2,306 plots located in the London periphery/south-east market. As planning approval comes through, and the market rises further, then there is obvious scope for an uplift in valuations. In fact, Mr Hall calculates that "as a ready reckoner every 10 per cent house price movement on a £250,000 property adds £12,000 to the value of the plot". Extrapolate this across Inland's land bank of 2,300 plots and an uplift of that order would add £27.6m, or 13.7p a share to the company's net asset value of 28.7p. Moreover, that book value is already conservative as it doesn't factor in the 5p a share of future net profits embedded in profits from Drayton Gardens. In other words, you could easily see a scenario of rising house prices whereby Inland is not only enjoying a surge in profits, but the value of its land bank is soaring too.
And it's the conservative book value of the company's landbank, and the future profits embedded in it, which makes me more than happy to value Inland's shares well above the current net asset value of 33.7p a share including the 5p wind fall from Drayton Gardens.
In my opinion, a price-to-book value multiple nearer 1.5 times is in order, which would lift Inland's shares to 50p, or 25 per cent above the current level. And with finnCap expecting pre-tax profits to rise a further 40 per cent to £7m in the current financial year to June 2014, before hitting £9m in 2014-15, the prospective earnings multiple is set to drop sharply from a forward PE ratio of 14 to only 11.
In the circumstances, I am raising my target price again from 48p to 50p and have no hesitation recommending that you buy the current dip.
A re-rating beckons
Shares in Aim-traded property developer and investor Terrace Hill (THG: 22.5p) have surged this year, and are up 43 per cent on an offer-to-bid basis since I advised buying at 15.4p in February when I included the company as one of my Bargain Shares picks of the year.
However, on every metric it is only realistic to expect further gains. That's partly because the company's risk profile has improved markedly since the start of the year, but also reflects the potential for more valuation uplifts in the coming year.
Much improved financial profile
Following a site sale and forward funding agreement for the company's 1,104 unit student accommodation scheme in Southampton, and the disposal of the majority of its remaining residential assets, Terrace Hill's balance sheet gearing has been slashed to only 29 per cent at the end of March. Net borrowings, including the company's share of joint ventures and associated undertakings, have fallen from £85.7m little over a year ago to £17.9m. That comprises £18.5m cash on the company's balance sheet, on balance sheet borrowings of £28.9m and off balance sheet financial liabilities of £7.5m. The weighted average interest rate on this debt is 3.3 per cent, with maturity extending out to 21 months after factoring in loans where the expected terms have been agreed, but not yet documented. In other words, not only is the loan-to-value ratio comfortable, but the cost of these short-dated lines of credit is relatively attractive. Moreover, with cash in the bank, the company is in a strong position when it comes to renegotiate these credit lines as has proved the case.
There is scope for further debt reductions, too, as Terrace Hill has bought out a joint-venture partner to take ownership of 47 residential assets worth £5.3m, all of which will be sold off on a piecemeal basis.
The obvious implication of this ongoing debt reduction is to significantly improve the financial risk profile on the company's short-dated borrowings, which was the major reason the shares had been trading on a huge discount to net asset value. But even after the re-rating the share price discount to book value is still far too deep, especially as the company has been growing its net assets. In fact, Terrace Hill's net asset value was 29.2p a share at the end of March, having risen from 28.3p at the end of September.
Furthermore, property analysts at broker Oriel Securities predict that Terrace Hill will report an end-September 2013 net asset value of 31p a share when the company releases its full-year results at the start of December. On that basis, the shares are trading on a 26 per cent discount to book value. In my view, such a discount is wholly unjustified once you consider the potential for value creation in the remaining commercial property developments.
In particular, prospects for the company's supermarket store developments look well underpinned. Since the March half year-end, Terrace Hill has completed three new food stores comprising 189,265 sq ft of aggregate floor area at Sunderland, Sedgefield and Skelton. Importantly, all were pre-let and forward funded for a total capital value of £64m. This type of funding agreement is sensible as it also mitigates financial risk. In terms of the pipeline, another four substantial foodstores are currently in the planning process. Interestingly, chief executive Philip Leech points out that his company is still experiencing decent demand from retailers for the right type of store in the right location. That's hardly surprising given that Terrace Hill has close relationships with several large food retailers - Asda and Sainsbury's are two clients. The pipeline of development projects is "progressing well".
Promising commercial developments
Other commercial developments include a leisure complex development in Darlington incorporating a nine-screen cinema, an 80-bedroom hotel and six restaurant units. Terms have been agreed with Vue Cinemas and Whitbread with anticipated completion of the £30m development towards the end of 2014. Further deals in the leisure sector are being explored.
It's also worth noting that Terrace Hill's investment in the development at Howick Place in London's Victoria has now completed and the majority of the 25,300 sq ft of residential units have now been let or sold. There has been a good level of occupier interest in the 135,000 sq ft of office space, more news of which we can expect in eight weeks time when the company reports its full-year results. Other deals include a 29,000 sq ft office and retail development at Conduit Place, Mayfair, where Terrace Hill is the development manager. Given that capital and rental values in central London continue to rise, the company is likely to have benefited from valuation uplifts at both these upmarket schemes.
Terrace Hill has also signed pre-sale and development agreement secured with Kondor to develop a 60,000 sq ft warehouse at the company's Christchurch Business Park in Dorset.
Technical set-up favours a bounce
Having drifted down since hitting a multi-year high of 25.25p in mid-September, shares in Terrace Hill are heavily oversold. The 14-day relative strength index is close to 20 and the price looks to be finding support around the June and February highs of 22p from earlier this year. For good measure, the price is not overextended above its long-term moving averages. In fact, the 200-day moving average has now played catch up with the price surge from earlier this year and is currently around 20p.
In my opinion, the prospect of an upbeat set of financial results, coupled with good news on debt reductions and the pipeline of developments should be enough to prompt a decent share price re-rating in the coming months. Needless to say, I rate the share a buy and have raised my target price to 27.5p, which coincides with the February 2011 high. If this can be breached, then a re-rating of the shares to book value, or beyond, is not an unrealistic possibility. Trading on a bid-offer spread of 21.5p to 22.5p, I strongly believe Terrace Hill's shares are worth buying ahead of the results. My time-frame is four months for this trade.
In the past fortnight, I have published 12 other articles on the following companies or trading strategies:
■ Global Energy Developments ('Waiting for pay dirt', 23 Sep 2013)
■ IQE ('IQE profit-taking presents buying opportunity', 23 Sep 2013)
■ 32Red ('32Red worth a punt', 23 Sep 2013)
■ Spark Ventures ('Banking on more cash returns', 24 Sep 2013)
■ Macau Property Opportunities ('Blue sky territory', 24 Sep 2013)
■ KBC Advanced Technologies ('Riding an earnings upgrade cycle', 24 Sep 2013)
■ Inland ('Buying opportunity ahead of results', 25 Sep 2013)
■ US Dog share portfolio ('Easy as pie', 27 Sep 2013)
■ Conygar ('Shrewd insider buying at a property play', 30 Sep 2013)
■ Netcall('Ringing the right tune', 1 Oct 2013)
■ Eros ('Ringing the right tune', 1 Oct 2013)
■ Bloomsbury Publishing ('An e-commerce winner', 2 Oct 2010)
■ Simon Thompson's share recommendations, 2 Oct 2010
Finally, in response to requests from dozens of readers, I have published an article outlining the content of my new book, Stock Picking for Profit: 'Secrets to successful stock picking'
