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Small-caps on solid foundations

Simon Thompson assesses the latest trading news from the small-caps he follows with housebuilding activities
June 5, 2018

Early this year I recommended buying shares in four small-caps with housebuilding activities: Telford Homes (TEF:465p), Urban&Civic (UANC:332p), Inland Homes (INL:68p) and Henry Boot (BOOT:304p) (‘Alpha alert for housebuilders’, 3 January 2018). Results in the past week from Urban&Civic, a property group specialising in strategic residential land developments, and London housebuilder Telford Homes suggest that their 13 per cent and 10 per cent respective share price reratings are well underpinned.

Urban&Civic’s EPRA net asset value (NAV) posted a decent uplift, rising from 304p to 316p in the six months to end-March 2018. However, surveyors’ valuations incorporate a huge discount on the open-market prices of land parcels the company is achieving at its 1,432-acre freehold site at Alconbury Weald, incorporating Cambridgeshire's Enterprise Zone; Wintringham St Neots, located just south of Alconbury; and at the 1,170-acre site in Rugby. Marking land to open-market prices lifts NAV per share by 88p to 404p, implying a further 20p a share of unrealised value has been added to land holdings since September with the valuation risk skewed to the upside. Buy.

Telford Homes produced the storming set of full-year results I had anticipated, increasing pre-tax profit and EPS by over a third to £46m and 50p to support an 8 per cent hike in the dividend per share to 17p. I initiated coverage on the shares, at 289p, post the Brexit vote ('London property trading play', 22 August 2016).

Chief executive Jon Di-Stefano says the ongoing de-risking of Telford’s development pipeline of 4,000 homes through build-to-rent schemes underpins expectations that his company can deliver annual pre-tax profits in excess of £50m over the next three financial years. These projects have gained strong interest from institutional investors attracted by London’s ongoing population growth, a chronic housing shortage and the upward pressure on rents. A GMB study of official data shows that between 2011 and 2017 average rents for two-bedroom flats in London increased by 25 per cent. The highest growth rates have been to the east, Telford’s heartland. The trend is unlikely to change any time soon given that new housing starts are less than half Mayor Sadiq Khan’s stated goal. The pipeline’s relatively low £539,000 average selling price optimises rental yields too.

Importantly, the potential for Telford to deliver cumulative EPS of 170p and dividends of almost 57p over the next three years is not priced into a modest valuation of 1.3 times net tangible assets estimates, nine times EPS forecasts of 55p and a prospective dividend yield of 4.1 per cent based on estimates from Peel Hunt and Equity Development. Buy.

Henry Boot’s share price has pulled back by 5 per cent since January, and unjustifiably so given that analysts at brokerage WH Ireland actually edged up their current-year EPS estimates to 29.3p following the annual meeting. In the year to date, land development business Hallam Land has sold more than 1,841 plots on 12 sites (equating to 85 per cent of 2017 total sales), exchanged contracts on two other sites and is in discussions for the disposal of a further 15 schemes in 2018 and 2019. Land sales accounted for almost 40 per cent of Henry Boot’s operating profit last year, and expect another positive outcome. True, bad weather held back activity in the construction and plant hire businesses, but they are still trading in line. Rated 25 per cent below analysts’ sum-of-the-parts valuations, on 10 times forward earnings, and underpinned by a 3 per cent prospective yield, Henry Boot’s shares rate a buy.

Finally, the 10 mid-caps I recommended buying in January (‘Alpha alert for housebuilders’, 3 January 2018) are now only 1.7 per cent in the red after taking into account dividends. As this was always a short-term seasonal trade, I am happy to close it out and focus on the small-caps in the sector offering specific drivers for a rerating.

 

FTSE 350 housebuilders' share price performance 2018 
CompanyPrice (p) 02.01.18Latest price 04.06.18Dividends (p)Percentage change (%)
Bovis1184126932.59.9
Persimmon2,73528671259.4
Countryside Properties3503704.26.9
Berkeley (note one)4,209427656.752.9
Taylor Wimpey203190.512.840.2
Redrow6476109-4.3
Bellway3,580333248-5.6
Galliford Try (January price adjusted for rights issue)1,10298528-8.7
Barratt6505638.6-12.1
Crest Nicholson54744121.8-15.4
Average    -1.7
Deutsche Bank FTSE All-Share tracker (XASX)434430.616.543.0

 

■ Simon Thompson's new book Successful Stock Picking Strategies was published on 15 March and can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source and is priced at £16.95 plus £2.95 postage and packaging. 

Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order.