At the start of the year I decided to once again exploit the tendency of the housebuilding sector to rally in the first three months of the year (‘Alpha alert for housebuilders’, 3 Jan 2018). So how have I fared?
Urban&Civic value accretive planning consent
Urban&Civic (UANC:307p), a listed property group specialising in strategic residential land developments, has made three major announcements in the past few weeks, the latest being the receipt of planning approval for a development site in St Neotts, Cambridgeshire, in which the company acquired a 33 per cent stake for £13.3m in April 2017.
Huntingdonshire District Council has just approved plans for the construction of up to 2,800 new homes, two new primary schools, health facilities and 63,000 sq metres of new employment space. Without placing a value on the commercial space, the acquisition consideration equates to £14,285 per residential plot, a valuation that offers significant investment upside given the town’s direct rail link to London and road links to employment and property hot spot, Cambridge.
In addition, Urban&Civic has exchanged contracts on the conditional purchase of 785 acres of greenfield land on the Claydon Estate near Calvert in Aylesbury Vale, Buckinghamshire, offering potential for residential development in an area of nationally strategic importance. The site is located next to the new High Speed 2 (HS2) depot where the HS2 line will meet the proposed Varsity rail line, within the Cambridge – Milton Keynes – Oxford corridor, a priority area identified by the National Infrastructure Commission for new housing delivery.
These land deals add further substance to the investment case I made at the start of the year when Urban&Civic’s share price was 293p (‘Alpha alert for housebuilders’, 3 Jan 2018), and last autumn at 261p ('Trading plays', 9 Oct 2017). In fact, the company now owns or has the stewardship of over 5,500 acres across seven sites in or close to Cambridge, Calvert, Corby, Huntingdon, Newark, Rugby and St. Neots. These sites will deliver approximately 34,500 new homes, and in excess of 7m sq ft of business space over the next 15 years.
In addition, Urban&Civic has just been selected to partner Basingstoke and Deane Borough Council and Hampshire County Council for the 3,500 new homes site at Manydown, a planned strategic extension to Basingstoke which has excellent transport connections to London. Planning permission for the development could be forthcoming as early as the third quarter of this year, according to analysts John Cahill and Miranda Coburn at brokerage Stifel Europe. Private house prices are around £320 per sq ft in the area, suggesting a healthy land developer’s profit on land bank sales.
In light of these announcements, it’s hardly surprising that the company’s share price has made headway, up from 293p at the start of the year to 307p, a discount to Stifel Europe’s EPRA net asset value (NAV) per share estimate of 326p a share for the 12 months to the end of September 2018, and JP Morgan Cazenove’s 333p estimate. Moreover, there is hidden value in Urban&Civic’s balance sheet. Marking land valuations to open market prices adds almost 68p a share to the last reported EPRA NAV of 304p a share. Income seekers can expect a near 10 per cent uplift in the dividend to 3.5p a share, too. Buy.
Inland unloved and undervalued
Inland Homes (INL:60p), a specialist housebuilder and brownfield land developer, has posted a solid set of first-half results, the highlights of which are: the ongoing derisking of its development pipeline; strong progress on developing its land bank; and a housebuilding unit well placed to expand activity.
Inland has entered into construction contracts, worth over £43m, on land sales with three housing associations to build 220 homes, and is in advanced discussions to secure further partnership contracts. It makes sense to do so as selling parcels of consented land from its land bank of 7,372 plots releases profit and revenue earlier, the proceeds from which can then be used to reduce debt as well as avoiding the need for development loans and investment in sales and marketing. The lower profit margin earned on these partnership sales reflects the lower risk being taken. In the six months to the end of December 2017, Inland recognised £5.2m of the £43m contracted income from the three housing associations partnerships.
Not that the company is easing up on private sales as its housebuilding arm has a record 560 homes under construction, which have a combined gross development value (GDV) of £144m, including: 279 homes at two sites in High Wycombe which have £10.5m of forward sales; and the first phase of 72 homes at the 457 unit development at Chapel Riverside, Southampton. Having completed 96 homes at an average price of £322,000 in the first half, earning Inland an operating profit margin of 11 per cent on revenue of £30.3m, the private sales forward order book is up 22 per cent to £38.9m on the same period last year, equating to 120 homes, of which 70 have been reserved since the start of January. Affordable pricing, and a southern England geographic bias, are supportive of demand in the affluent areas Inland is targeting, as is the Help-to-Buy government loan scheme which is used by 61 per cent of Inland’s private purchasers.
There is clearly substantial value in Inland’s 7,372 plot land bank which has a GDV of £2.2bn and includes 2,218 plots with planning consent, options on 2,750 plots across 29 sites, and planning applications on 2,312 plots across five sites. For example, the 338 residential plots sold in the first half produced an operating profit of £5.9m on sales of £21.9m, or almost £65,000 per plot. If Inland wins planning approval for 350 homes which have a GDV of £350m on its flagship 100-acre site at Wilton Park, Beaconsfield, then the plots there will be worth hundreds of thousands of pounds each.
The profit booked from land sales in the first half adds weight to the 5 per cent increase in Inland’s fully diluted EPRA NAV per share of 92.78p (97.6p undiluted), which factors in £58m of unrealised gains on land holdings worth 27.5p a share.
I first included the shares in my 2013 Bargain Shares Portfolio at 23p ('How the 2013 Bargain Shares fared', 7 Feb 2014), and although the price has failed to make headway since I reiterated that stance at 62p in January (‘Alpha alert for housebuilders’, 3 Jan 2018), there is value on offer here. The hefty discount to book value aside, a PE ratio of eight and a 2 per cent dividend yield are attractive. Buy.
A boot’ful investment
I also suggested buying shares in residential land developer and construction company Henry Boot (BOOT:305p) at the start of the year (‘Alpha alert for housebuilders’, 3 Jan 2018), and the company’s ongoing strong operational performance warrants maintaining that advice: pre-tax profits surged by 40 per cent to a record £55.4m last year to boost EPS by almost half to 32.1p and support a 14 per cent hike in the dividend per share to 8p. Return on capital employed (ROCE) improved by more than four percentage points to 18.6 per cent, highlighting the value that is being created for shareholders, and with modest financial risk as balance sheet gearing is only 11 per cent.
To put the volume of activity undertaken into perspective, Henry Boot’s full-year revenues surged by a third to £408m, or more than double that achieved in 2015, buoyed by construction projects including Aberdeen Exhibition and Conference Centre, and the residential conversion of the former Terry's Chocolate Factory in York. The company also sold 15 strategic land sites, delivered over £60m of construction work, £17m of plant hire sales and almost £25m of new house sales through its joint venture house builder, Stonebridge Homes.
Importantly, the forward pipeline is just as encouraging with the estimated value of its commercial development scheme pipeline exceeding £1bn for the first time, and strategic land division, Hallam Land, increasing its land acreage by over 10 per cent to in excess of 13,000 acres, and that’s after taking account of the land sold during the year. Henry Boot also added 2,200 plots to its inventory of plots to sell, having obtained planning permission on 4,500 plots during the year. The scale and number of these sites and schemes, held as inventory, are at record levels and underpins a continuation of the high ROCE shareholders have being enjoying.
Trading on a 25 per cent share price discount to sum-of-the-parts valuations, offering a near 2.8 per cent prospective dividend yield, and priced on a forward PE ratio of 10 based on Peel Hunt’s 2018 EPS estimate of 29.5p, I rate the shares a buy.
Housebuilders first-quarter trade
Despite the resolute performance from the small-caps with housebuilding and land development activities I suggested buying at the start of the year, my standing dish first-quarter trading strategy on the FTSE 350 players has not played out (‘Alpha alert for housebuilders’, 3 Jan 2018). The 10 mid-cap companies are showing a loss of 11 per cent in a market down 8 per cent. It’s a rare occurrence, only the seventh time the sector has fallen in the first quarter since 1980.
That’s not to say that all is lost. It’s not as April is one of the best-performing months of the year: the FTSE All-Share has risen 39 times during the month in the past 48 years, producing an average monthly return of 2.5 per cent. Importantly, there is positive divergence on several of the housebuilders’ charts whereby recent share price lows have not been confirmed by a lower reading on the 14-day relative strength indicator. I can see scope to recoup some of your paper losses on these oversold shares, and would advise running your trading positions into April.
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