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A bootiful investment

A bootiful investment
February 19, 2015
A bootiful investment

That’s because we are still able to buy the shares at little more than the price on the day the company issued its major earnings beats on 9 December 2014 and 22 January 2015. Following a 12 per cent earnings upgrade in mid-December, analyst Nick Spoliar at broking house W.H. Ireland upgraded his numbers again by around 19 per cent late last month and now anticipates Henry Boot will report pre-tax profits of £28m on revenues of £161m for fiscal 2014, up from £18.4m and £153m, respectively, in 2013. On this basis, EPS soars by more than two thirds to 14.8p which easily supports the 10 per cent forecast hike in the pay-out to 5.5p a share. The forthcoming results will undoubtedly make for an impressive read.

I think it’s only fair to point out that Henry Boot is a company I know all too well, having first advised buying the shares when they were around the 140p level (‘A bootiful investment’, 13 June 2011). I last assessed the investment case a little over two years ago when the price offered a fantastic buying opportunity at 124p (‘Re-rating beckons’, 12 November 2012). It proved the right call in hindsight as the shares doubled in value over the subsequent 14 months, hitting a high of 249p in January last year. Since then the price has gone sideways, but I feel that a return to those highs could well be on the cards now especially when investors become fully aware of the progress the company has been making, something that will be blatantly clear when Henry Boot’s board releases its full-year results at the end of next month. The recent trading updates were pretty vague as to the nature of the upgrades, something I have been trying to determine. On this score, the news is rather good.

In fact, the earnings upgrades in the past few months reflect a strong performance from all of the company’s businesses: property investment and development; construction; and residential land development. Not surprisingly, the residential unit has been making strong headway in light of the improvement in the housing market in the past couple of years. Through its subsidiary Hallam Land, Henry Boot currently has interests in over 9,800 acres of land of which about 20 per cent is owned outright, 40 per cent is under option and the balance is held under planning promotion agreements. The inventory value of these holdings was in the books for £92m at the end of June 2014, but that’s a very conservative valuation as this land is held in the company’s accounts at cost rather than open market value. As a result when this land is sold onto property developers and major listed housebuilders in the current strong trading environment for land developers bumper profits are being realised.

Soaring profits and upbeat outlook for 2015

This partly explains why pre-tax profits for last year are predicted to soar by almost 75 per cent, but more importantly the outlook for 2015 is equally promising. That’s because Henry Boot’s board revealed in its January trading update that seven strategic land sales are on course for completion this financial year, having completed 11 disposals in 2014. Moreover, analyst Alison Watson at broking house Investec Securities rightly points out that “Hallam now has its largest ever number of sites with planning permission granted (40 sites) to bring to the market which will give the business a competitive advantage if planning gets tougher around the General Election.” These sites have, in total, 11,000 plots for disposal including schemes in Burton upon Trent, Bedford and Cranbrook. In addition, Hallam has six applications at the Appeal stage of the planning process totalling 2,510 plots, and a further 14 undetermined planning applications for a total of 6,500 plots.

Changes in legislation are proving a key driver too. Indeed, Ms Watson points out that “the housing market stimulus provided by the government’s stamp duty reforms (announced in the Chancellor’s Autumn Statement) should see a pick-up in demand for oven ready sites from house builders (Henry Boot’s key customer), in our view.” In terms of profits, Investec expects Hallam to report operating profit of around £12.5m in 2014, to account for half the group total, and for land sales this year to be ahead of those in 2014. In turn, this underpins an anticipated 10 per cent hike in Henry Boot’s recurring pre-tax profits to around £26.4m in 2015, up from £23.9m in 2014, according to Investec’s estimates.

Please note that W.H. Ireland forecast a 2015 IFRS pre-tax profit of £29m, but this figure also includes valuation uplifts on the company’s property portfolio. On the same basis, Investec is actually looking for a 2015 reported pre-tax profit of £30.7m. Either way the shares are hardly being overvalued on 11.5 times 2015 normalised EPS estimates of 17.5p. Based on a further 10 per cent hike in the payout to 6p a share, the prospective dividend yield is nigh on 3 per cent.

Valuable property holdings

It's reasonable to expect upside from the company’s commercial property investments too. It’s worth noting that the company has its largest development pipeline - gross development value of £136m - since 2007, with profits worth 13.7p set to be realised from these activities by 2018 according to analysts. Schemes include a 69,000 sq ft factory extension on the company’s industrial investment in Stoke-on-Trent which has completed on time and, with a 20-year lease in place with the existing tenant, is expected to have a positive impact on the company’s portfolio valuation in next month’s results. Other developments in a strong pipeline include two budget hotels pre-let to Premier Inn and Travelodge, both of which will complete this year.

Henry Boot also has an investment portfolio, worth £138m, and generating gross rental income of around £7.3m. The valuation risk here looks firmly to the upside in my view given increasing regional investment demand for commercial property. And let’s not forget that the company also has a highly profitable construction arm making annual operating profit of around £8m and which has already secured 70 per cent of its 2015 projected budget. Projects here include work in social housing, highways and the health sector.

Sound balance sheet and finances

It’s reassuring to know that Henry Boot has been able to achieve its stellar profits without having to over gear its balance sheet. In fact, net debt of £33m at the June half-year end equated to only 17 per cent of shareholders funds of £196m and represented less than 25 per cent of the value of the company’s investment properties. Operating profit in 2014 is likely to have covered the £1.1m interest charge 24 times over, leaving ample funds available to reward shareholders with yet another dividend hike, something the board have been determined to do.

In fact, in the past 20 years the pay-out has been raised by over 250 per cent. That represents an annual average increase of 6.4 per cent during which time the company has also grown its net asset value per share by 300 per cent to 148p. In other words, Henry Boot has managed to both reward shareholders with a growing income stream and valuation creation, a feat that not many companies can achieve over the long-run and in my view the true test of a company’s business model.

Target price

As I have noted earlier, the company’s balance sheet is not only conservatively geared, but also understates the true worth of the component parts of the business. Factor in the profits embedded in the development pipeline, mark investment properties and land holding to market value, and analysts at Investec calculate a sum-of-the-parts value of 277p per share. W.H. Ireland are more aggressive and have a fair value target price of 317p.

They may prove right in their assumptions, but I am going to be less aggressive in the near-term and believe that a return to the 249p highs of last year is not just a realistic short-term target, but a highly probably one too in light of next month’s eye-catching financial results and yet more positive news flow on trading. A move through last month's high of 214p would be strong confirmation that the multi-month consolidation period is over and a return to the 249p highs from early last year is highly likely. But I would be acting ahead of that that price move. So offering 20 per cent share price upside, I rate Henry Boot’s shares a strong short-term buy now on a bid-offer spread of 202p to 205.5p. The timeframe for this trade is three months.

Please note that I am currently reviewing the financial results released today by Avation (AVAP), Jarvis Securities (JIM) and the pre-close trading update from Inland (INL) and will be updating my views in due course as soon as I have completed my analysis.

■ Simon Thompson's 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 stockpicking'