The key reason why my annual bargain share portfolios have performed so well over the years is that I have targeted small-caps and micro-cap companies where I can use my stock picking and analytical skills to gain an edge. That’s because there is a paucity of institutional research and media coverage in this space, thus creating market mispricing opportunities and valuation anomalies to exploit.
I also use seasonal investing strategies to super charge returns. That’s relevant right now because the tendency of the UK-listed housebuilding sector to rally in the first quarter is one of my standing dish trades of the year. I first discovered this phenomenon while carrying out quantitative research almost two decades ago ('Time to take stock', 14 November 2003). The trading strategy has stood the test of time: since 1980, the sector has rallied 85 per cent of the time in the first quarter to deliver an average net gain of 11 per cent. Losses during the down years have been manageable.
A rebounding UK economy, tight labour and housing markets, low mortgage rates and generous home buyer government schemes point towards a continuation of this trend. That’s good news for two of my sector small-cap picks.
Springfield’s earnings growth underrated
- Earnings accretive acquisition of Highland Developer, Tulloch Homes
- £22m placing at 140p a share funds half of initial cash consideration
- Earnings per share (EPS) upgrades of 7 per cent, 12 per cent and 9.9 per cent for 2022-2024
- Dividend per share forecasts hiked by 8 per cent, 11 per cent and 7 per cent for 2022-2024
Springfield Properties (SPR: 147p), a housebuilder focused on developing a mix of private and affordable housing in Scotland, looks primed to benefit from a strong domestic housing backdrop, recent earnings upgrades and improved investor sentiment.
Last month the group acquired Tulloch Homes, a profitable, cash generative and well-run housebuilder with significant land ownership in the Scottish Highlands around Inverness. Strategically, the acquisition boosts the group’s foothold in an area of high demand in Scotland where Springfield has been organically building a presence; strengthens the group’s private housing land bank as well as creating an opportunity for affordable housing; and adds supply chain capabilities such as access to labour and subcontractors.
The deal is earnings enhancing, too. In the financial year to 30 June 2021, Tulloch sold 219 homes, generated revenue of £46.4m and operating profit of £6.3m. This means that the initial net cash consideration of £43.4m (funded from a £22m placing and £21.4m of bank borrowings) and deferred cash consideration of £13m (half payable in December 2022 and August 2023) equates to nine times historic operating profit.
Furthermore, Tulloch’s proforma net asset value (NAV) of £74.6m includes a 1,791-plot land bank, of which 87 per cent has planning permission and 91 per cent is owned outright, with a gross development value (GDV) of £375m, or seven years’ development at current rates of activity. Springfield now controls 17,072 plots with a GDV of £3.5bn, the equivalent of 14 years output.
Factoring in the contribution from Tulloch, analysts at Progressive Equity Research now expect the group’s EPS to rise 11 per cent to 15.9p in the 12 months to May 2022, rising to 19.2p (2023) and 20.6p (2024). Moreover, with estimated closing net debt of £49.7m equating to only a third of NAV at May 2022, and operational cash flow set to more than double to £19m in both the 2023 and 2024 financial years, analysts have upgraded their dividend per share estimates sharply to 6.5p, 7.5p and 8p for the 2022-2024 forecast period. On this basis,
The forward price/earnings (PE) ratio of 9 falls to 7.5 within two years and the prospective dividend yield of 4.4 per cent jumps to 5.4 per cent. Estimated NAV per share of 121.6p (May 2022) is set to surge to 150p by May 2024 after factoring in retained earnings after dividend payments.
The holding has generated a 9 per cent total return (TR) since I included the shares, at 135.6p, in my 2021 Bargain Shares Portfolio, albeit that is shy of the portfolio’s TR of 24 per cent. However, as more investors take note of Springfield’s strong forward order book, earnings growth profile and potential to release hidden balance sheet value from land holdings, a strong share price re-rating could and should materialise. Buy.
|2021 Bargain Shares Portfolio Performance|
|Company name||TIDM||Market||Opening offer price 05.02.21||Bid price 05.01.22||Dividends||Percentage change (%)|
|Vietnam Holding (see note one)||VNH||Main||201.4p||356p||0.0p||89.1%|
|San Leon Energy||SLE||Aim||27.5p||40.75p||0.0p||48.2%|
|Canadian General Investments||CGI||Main||3,611c||4,405c||88c||24.4%|
|Downing Strategic Micro-Cap||DSM||Main||69p||72p||0.8p||5.5%|
|FTSE All-Share Total Return||7,135||8,499||19.1%|
|FTSE AIM All-Share Total Return||1,384||1,405||1.5%|
Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the tendered shares at the lower market price (284p offer price on 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188.3p a share.
Source: London Stock Exchange
Inland Homes primed for a re-rating
- Debt reduction following sale of final phase of Carters Quay development in Poole
- Refinanced facilities at Cheshunt Lakeside on significantly better terms
- In negotiations with a major Build to Rent fund for the development of Phase 1b of Cheshunt Lakeside
Inland Homes (INL:56p), a south-east England-focused housebuilder and brownfield land developer, is set to release a robust set of annual results later this month and has made further progress deleveraging its balance sheet since the pre-close trading update (‘Bargain shares: On the property beat’, 1 November 2021). It’s certainly not priced in as the shares are priced on an unwarranted 43 per cent discount to historic European Public Real Estate Association (EPRA) NAV of 97.66p and on a modest forward PE ratio of 8 for the 2021/22 financial year.
Furthermore, following the autumn trading update, Inland has sold the final phase of its Carters Quay development in Poole to Bournemouth, Christchurch and Poole Council, having acquired brownfield land, formerly the Pilkington Tile Factory, and worked with the local council to regenerate the unused industrial site to create new homes and commercial space.
The last phase of the scheme will provide 161 new homes and 8,000 square feet of commercial space with construction starting in April. The contract is for a total consideration of £43.5m over the next 36 months, with monthly stage payments being made to Inland Homes as the project progresses. Inland has received a deposit, together with an advance payment of £8.25m which reduces proforma net debt to £110m, or around 50 per cent of EPRA NAV.
The group has also refinanced facilities at Cheshunt Lakeside where planning consent was secured in 2019 for 1,725 homes. A mezzanine loan facility of £14.25m with Homes England has been agreed on considerably better terms than the previous facility, together with a £7.4m infrastructure facility and an additional interest and fees roll-up facility of £2.85m. In addition, Inland is in advanced negotiations with a major Build to Rent fund for the development of Phase 1b of the scheme, which will result in a further 205 new homes being built, thus creating additional shareholder value.
|Simon Thompson's Bargain Shares Portfolios Performance (2016-2021)|
|Portfolio||Portfolio total return to date||FTSE All-Share total return to date||FTSE Aim All-Share total return to date|
Source: London Stock Exchange, FTSE International, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Latest prices at 5 January 2022.
Inland's share price is slightly shy of the 57.75p entry point in my 2019 Bargain Shares Portfolio, albeit the price did hit highs of 94p in early 2020 prior to that year’s Covid-19 pandemic stock market crash. The disconnect between Inland’s growth expectations – analyst Adrian Kearsey of house broker Panmure Gordon expects pre-tax profit to rise almost 50 per cent to £19.9m in the 2021/22 financial year to deliver EPS of 6.9p – and the current rating is worth exploiting. Buy.
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