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Inland’s low rating hard to justify

High-yielding shares in the south-east of England focused housebuilder and brownfield land developer are incredibly lowly rated on a PE ratio of 6.5 and priced on half net asset value
December 17, 2018

Inland Homes (INL:50.5p), a south-east of England-focused housebuilder and brownfield land developer and one with a £100m market capitalisation, has issued a trading update that makes the sell-off in its shares since I last covered the investment case in the summer hard to justify ('Homing in on land deals', 12 Jun 2018).

The company is trading in line with expectations of house broker Panmure Gordon that point towards Inland lifting full-year pre-tax profits and EPS by 6 per cent to £20.5m and 7.7p, respectively, on revenues of £185m in the 12 months to the end of June 2019, an outcome supportive of the brokerage’s forecast hike in the payout from 2.2p to 2.6p a share. The forward PE ratio of 6.5 and 5.1 per cent prospective dividend yield aside, the shares are also priced on a 50 per cent discount to Inland’s last reported EPRA net asset value (NAV) of 102p a share.

A key take for me from management’s update at the annual meeting is that Inland is on course to achieve 80 private new-build housing sales at an average price of £252,000 in the first half to the end of December 2018, and guidance is for a similar performance in the second half. This suggests that by targeting the lower end of the market in the regions, Inland’s private housebuilding activities are proving resilient even in a less benign market environment. Around 60 per cent of sales are from buyers using the government’s Help to Buy scheme, so its extension in the autumn Budget is clearly a positive.

In addition, the residential construction order book for Inland Homes Partnership Housing business currently stands at £90m, and a further £60m of new opportunities are in negotiation. Around £10m of sales from this activity have been booked in the first half of the current financial year. It makes sense to do these deals with housing associations and local authorities, as it enables Inland to recognise land profits early while securing a self-funded, cash-positive and profitable construction contract. In turn, cash proceeds from these low-risk contracts can be used to reduce debt, and avoid the need to raise financing, or invest in sales and marketing.

The majority of Inland’s profits are still made from selling down a very conservatively valued £100m land bank to housebuilders. The company’s owned or controlled land bank currently stands at 7,000 plots, of which 1,700 plots are consented and around 2,000 plots are in the planning pipeline. This excludes the recent sale of 386 plots at Ashton Clinton, Buckinghamshire, to a top-10 housebuilder which generated a £7m management fee for Inland.

True, the economic uncertainty surrounding Brexit and the autumn stock market sell-off has made investors far more cautious, but Inland has substantial asset backing and a well-financed balance sheet. The company’s last reported net borrowings of £79.7m equates to 38 per cent of EPRA NAV of £206.7m, and it has substantial untapped credit facilities to fund construction costs, and finance site acquisitions. Inland also owns £52.8m of investment property producing an annual operating profit of £2.4m.

So, having included the shares in my 2013 Bargain Shares Portfolio at 23p, since when the board has paid out total dividends of 5.52p a share excluding the final payout of 1.55p for the 2017-18 financial year which goes ex-dividend on Thursday 27 December 2018, I feel the unwarranted sell down in Inland’s shares since the summer represents a repeat buying opportunity, especially as the equity risk premium embedded in the current share price is now at extreme levels.

For good measure, there is positive divergence on the chart with the 14-day relative strength indicator on the heavily oversold shares higher at the 6 December low than at both previous lows on 21 November and 25 October, suggesting signs of seller exhaustion and a base formation. Buy.

 

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