Bargain shares: Built for a material recovery

On first glance, an interim pre-tax loss of £5.8m on 30 per cent higher revenue of £78m looks a poor result from Inland Homes (INL:54p), a south-east England-focused housebuilder and brownfield land developer. However, there are timing issues that impacted the figures, the most significant of which was the delay in the receipt of a £4.5m asset management fee relating to planning consent at the former Homebase site in Walthamstow. The payment was received two weeks after Inland’s 31 March 2021 period end following receipt of planning consent for 583 units on the site, hence the delay.

More importantly, Inland has exchanged contracts to sell 355 private units for £116m on the site, split £27.5m for the land and a build contract of £88.5m. This takes the group’s partnership housing contract income forward order book to £140m. Inland is also at an advanced stage of negotiations with a major housing association to deliver the remaining homes on the inner-city site. The £41.9m contract is expected to be signed shortly. As the Walthomstow scheme and others progress, then Inland will receive further milestone payments under its asset light management contracts. 

It’s worth noting, too, that Inland is set to receive £14m proceeds from the sale of 53 plots at its flagship Wilton Park development in Beaconsfield when that deal completes in September. There are a further 157 plots to sell on the site in addition to the refurbished former Ministry of Defence homes currently being marketed. Since the March half-year end, Inland has received £5.2m from the completed sales of eight refurbished houses. Inland’s first half loss also included a £1m impairment charge on the carrying value of the surplus investment properties and one commercial property on the Wilton Park site. The properties have been valued at £11.1m and the directors expect them to be sold within 12 months.

The cash inflows from both Inland’s 10,573 plot land bank and housing sales – the group has forward residential home sales of £39.1m and at an average selling price of £254,000 they are aimed at the affordable end of the market – explains why management guidance is unchanged for the full-year. Net debt declined 10 per cent to £133m in the first half and analysts at house broker Panmure Gordon expect it to be slashed to £98m by the 30 September 2021 year-end. They also pencil in a sharp recovery in pre-tax profits from £3.7m to £13.4m on 25 per cent higher revenue of £125m. On this basis, the shares are priced on a forward PE ratio of 12. 

Admittedly, Inland's shares are trading marginally below the 57.75p entry point in my 2019 Bargain Shares Portfolio, but I can see catalysts for a share price recovery. That’s because as the group reduces borrowings then the financial risk embedded in the share price (which has led to an elevated equity risk premium) should start to unwind and drive a material narrowing of the 45 per cent share price discount to European Public Real Estate Association (EPRA) NAV of £223m (97.6p a share). I am also reassured that management has taken action to address the construction cost issues (some Covid-19 related) that contributed to a below par gross margin in the first half. Recovery buy.

Note 1: Simon advised taking profits on TMT Investments at 580c a share to bank 140 per cent gain including dividend of 20c ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares  at 318c ('On the hunt for recovery buys', 6 July 2020). 

Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is used in the performance table.

Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is used in the performance table.

Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices at 4.35pm on 1 July 2021 or when Simon advised exiting the holding.

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