In chapter seven of The Intelligent Investor, the seminal 1949 work of Benjamin Graham, the father of value investing explains: "If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue – relatively, at least – companies that are out of favour because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market, and it suggests an investment approach that should be both conservative and promising."
Mr Graham's theory was that a strong balance sheet will usually see a company through any short-term difficulties and provide a "margin for safety". Following this specific stock-picking technique has served me well over the years, hence why my annual Bargain Shares Portfolio has produced a 21.8 per cent average return in its first 12-month holding period over the past two decades, or 18 percentage points more than a FTSE All-Share index tracker fund. The high returns also highlight why the valuations of many companies that have fallen out of favour have a habit of reverting back to the mean.
Land Securities launches bid for U+I
- £190m recommended cash offer represents 70 per cent premium to U+I’s average share price in the last three months.
- Land Securities plans to invest £600m to £800m into three of U+I’s schemes.
U+I (UAI:149p), a specialist property developer and investor in regeneration projects, has recommended a £190m cash offer of 149p a share from FTSE 100 Reit Land Securities (LAND). The bid represents an 8 per cent discount to the last reported net asset value (NAV) per share of 162p (31 March 2021), but is in line with Liberum Capital’s 152p live NAV estimate.
It’s easy to see why Land Securities is interested as the group's valuable development assets include: a 50 per cent share in the Mayfield mixed-use generation project in Manchester city centre, a £1.5bn gross development value (GDV) scheme across a 24-acre site; Morden Wharf, a £770m GDV residential, retail and warehouse scheme on Greenwich Peninsula; and Landmark Court, a £240m GDV office, retail and residential scheme on London’s South Bank. Land Securities plans to invest £600m to £800m into the three schemes, while also gains additional development upside through two of the group's long-term projects in Cambridge and Lambeth in London.
The three main regeneration assets have a gross asset value of £58m in U+I’s accounts. In addition, U+I has 35 other projects (representing its non-core development and trading assets) which have a gross asset value of £126m, and an £85m investment portfolio. The major issue has been monetising the regeneration assets while freeing up enough capital through non-core asset sales to de-gear its balance sheet. True, the group slashed net debt from £130m to £72m in the last financial year, and has restructured under a new management team, but ultimately Land Securities has the financial clout to fully exploit the value of the development opportunity in U+I’s assets.
Although the cash offer represents a 65 per cent return on my 90p a share recovery buy call (‘Opportunities in property’, 26 May 2021), the holding has still produced a 15 per cent net loss on the entry point in my 2018 Bargain Share Portfolio. But this is bearable in view of the portfolio’s overall 100 per cent total return, highlighting the importance of portfolio diversification. Land Securities offer has the backing from shareholders owning 35 per cent of the shares, but I would sit tight for now just in case any other well capitalised developers are working the numbers. Sit tight.
|2018 Bargain shares portfolio performance|
|Company name||TIDM||Opening offer price on 02.02.18 (p)||Bid price on 01.11.21 or exit price (see notes)||Dividends (p)||Total return (%)|
|U and I Group||UAI||205||149||25.5||-14.9|
|Crystal Amber (note one)||CRS||207.2||140||7.5||-28.8|
|Titon (note two)||TON||159.86||85||9.5||-40.9|
|FTSE All-Share Total Return index||7088||8233||16.2|
|FTSE AIM All-Share Total Return index||1184||1421||20.0|
1. Simon Thompson advised selling Crystal Amber's shares at 140p ('Crystal Amber takes a hit', 10 December 2019)
2. Simon Thompson advised selling Titon's shares at 85p ('Taking Aim for gains', 24 February 2020)
Inland Homes set for another year of bumper growth
- Record annual revenue of £195m, up from £124m in 2019/20 financial year.
- Analysts expect full-year pre-tax profits of £13.4m, up from £3.7m, and EPS of 4.5p.
- Partnership housing order book up 56 per cent to £165m.
- Private housebuilding sales more than double to 216 units.
- Net debt cut from £148m to £118m.
Inland Homes (INL:50p), a south-east England-focused housebuilder and brownfield land developer, has released a reassuring pre-close trading update and one that is highly supportive of the investment case.
The record revenue performance was buoyed by the sale of the first two phases of 90 plots at the group’s flagship Wilton Park residential development in Beaconsfield, the second of which completed just before the 30 September financial year-end and realised £14m for 53 plots. The whole development comprises 304 new homes in addition to the refurbished former Ministry of Defence homes, thus highlighting potential for further large gains to be booked. Other major land sales in the pipeline include the next phase of 205 plots at the group’s Cheshunt Lakeside joint venture development which has planning for 1,725 new homes.
Inland has also recently been awarded planning consent at Gardiners Park Village, Basildon for 700 new homes (31 per cent affordable housing), 25,000 square metres of commercial space, new school and community facilities. The GDV of the 54-acre site exceeds £200m and the scheme is being delivered over a five-year period through a public/private partnership approach with Homes England. Construction of the first phase of 74 homes is expected to commence early next year. This means that 37 per cent of the land division’s 10,055 plot land bank has planning consent, up from 22 per cent 12 months ago, a strong indicator of the value that’s being created for shareholders.
Prospects for Inland’s partnership housing business are equally robust. Revenue for the financial year just ended will be substantially higher than the £51.8m reported in the 2019/20 year. Moreover, the divisional forward order book has surged from £140m to £164.7m since early July (‘Bargain shares: Built for a material recovery’, 2 July 2021), representing 56 per cent year-on-year growth.
|Simon Thompson's 2019 Bargain Shares portfolio performance|
|Company name||TIDM||Opening offer price 01.02.19||Bid price 01.11.21 or exit price (see notes)||Dividends||Percentage change|
|TMT Investments (note one)||TMT||250¢||885¢||20¢||567.9%|
|Futura Medical (note two)||FUM||14.85p||34p||0p||129.0%|
|Litigation Capital Management||LIT||77.5p||115p||0.71p||49.3%|
|Mercia Asset Management (note three)||MERC||29.57p||27.5p||0p||-7.0%|
|Jersey Oil & Gas||JOG||205p||143p||0p||-30.2%|
|FTSE All-Share Total Return index||6,852||8,233||20.2%|
|FTSE AIM All-Share Total Return index||1,023||1,421||38.9%|
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. Current share price 32p.
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 or when Simon advised exiting the holding.
On the private housebuilding side, revenue more than doubled from £23.8m to £56.5m and weekly net reservation rates have soared from 0.69 to 1.05 units per sales outlet, highlighting the ongoing demand for the group’s relatively affordable new homes which have an average selling price of £262,000 (£240,000 in 2019/20). Although input cost pressures are an issue for all housebuilders, in a buoyant housing market these can be offset through higher selling prices.
Importantly, net debt has been slashed by 20 per cent to £118m, thus allaying fears that have been depressing Inland’s rating - the shares trade on a massive 50 per cent share price discount to European Public Real Estate Association (EPRA) NAV. Expect the deleveraging to continue in the new financial year, too, when analysts are also predicting a 50 per cent hike in earnings per share (EPS) to 6.9p. On this basis, the shares are priced on 11 times earnings for the financial year just ended, falling to 6 times forward earnings.
Admittedly, Inland's shares are trading below the 57.75p entry point in my 2019 Bargain Shares Portfolio. But as further proceeds from land disposals and housebuilding sales are used to de-gear the group’s balance sheet, I envisage the heightened risk premium embedded in the share price to unwind and spark a strong share price recovery. At the current price, Inland is an obvious candidate for sector consolidation, too.
Ahead of the annual results and next trading update in January, the shares are worth buying.
This column was first published at 5pm on Monday, 1 November 2021 and updated on Tuesday, 2 November 2021 to incorporate the level of acceptances for the Land Securities offer.
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