A case in point is Aim-traded housebuilder and land developer Inland Homes (INL: 45.75p), a company I have favoured for the past 18 months, during which time the price has doubled. In fact, trading has been so strong that Inland profits will be ahead of upgraded market expectations for the fiscal year to end June 2014. Ahead of the forthcoming results, analyst Duncan Hall at broking house finnCap is forecasting a surge in revenues from £31.1m in fiscal 2013 to £44.3m for the 12 months to end June 2014. On this basis, expect a 60 per cent rise in both pre-tax profits and EPS to £8.1m and 3.2p, respectively.
Inland has been making progress in all areas of its operations with sales of open market residential homes doubling to 114 units in the period and at better margins too. These positive trends are set to continue as the company currently has 492 units under construction and boasts a record forward order book of £57.5m, including sales managed for its Drayton Gardens joint venture in West London. Of particular interest is the 152-unit West Plaza development in Ashford, near Heathrow airport which already has forward sales of £22.5m. To give you some idea of the ramp up in overall output - Inland doubled completions to 114 units in the latest 12 month trading period - work in progress has increased by 40 per cent to £93.6m since the end of December.
Importantly, the company has the finances to able to fund such stellar growth having raised £11.1m in the past year from the issue of sensibly priced zero dividend preference shares. Net debt of £28.8m is comfortable at less than half equity shareholder funds and free cash balances at the end of June of £11.2m are more than adequate to fund the company’s working capital needs.
Importantly, demand for Inland’s consented land bank from housebuilders remains strong as highlighted by the 169 plots sold in the 12-month trading period. The company has recently received residential planning consent for housing developments on sites in Woolwich, south east London (152 plots) and in Ipswich (around 100 plots), giving a further boost to the value of the land bank.
Indeed, the land bank of 3,565 plots, up from 2,306 plots a year ago, now includes more than 1,000 plots which are owned with planning consent (including those managed on behalf of the Drayton Garden Village joint venture); a further 843 plots which are owned/contracted without consent; and around half the land bank is either controlled or have terms agreed without consent. It’s worth flagging up that these land assets are very conservatively valued too.
Value in the shares
Although Inland shares trade on a premium of 1.5 times reported book value of 30p, this is misleading in my view. That's because the company has a further 2.66p a share of net profits (around £5.4m) embedded in its share from Drayton Gardens, which can be added to this net asset value figure. In addition, Inland's assets are held at the lower of cost and net realisable value and are not subject to any re-valuation. Integral to the business model is the purchase of brownfield land without planning permission, which will have a significant uplift in value once planning permission is obtained.
In turn, as planning permission is gained on more sites, then Inland's book value per share becomes even more conservative. There is a natural gearing effect of rising house prices on profits embedded in the land bank too as every 10 per cent rise in land prices adds around 14p a share to Inland's net asset value. To put this into some perspective, a 10 per cent movement in land prices in the next 12 months, combined with the net earnings of 3.9p a share forecast in the current financial year to June 2015, means that Inland's net asset value per share could easily exceed 50p within a year.
So, with current trading buoyant and profits set to surge 60 per cent when Inland reports results in September, it seems anomalous to me to value Inland’s shares on less than 12 times earnings estimates and below book value once you mark land assets to their realistic open market value. For good measure there is a dividend too as the board is forecast to almost double the final payout to 0.5p a share at next month’s full-year results. Mr Hall at finnCap predicts a dividend of 0.7p a share in the current financial year to June 2015, implying a forward yield of 1.5 per cent.
Needless to say, offering 33 per cent to my 60p target price, I rate Inland shares a decent buy on a bid-offer spread of 45p to 45.75p ahead of the forthcoming results.
■ Simon Thompson's new 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 £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
