Bargain shares: On solid foundations

Springfield Properties (SPR: 153p), a housebuilder focused on developing a mix of private and affordable housing in Scotland, flagged up its buoyant trading performance in a pre-close trading in early summer when analysts upgraded their full-year pre-tax profit estimates by 20 per cent on record levels of revenue (‘Exploiting margins of safety’, 1 June 2021). Importantly, the strong momentum has continued into the new financial year.

Springfield’s affordable homes division delivered 380 completions in the 12 months to 31 May 2021 and lifted its revenue contribution by almost 30 per cent to £55m, accounting for 25 per cent of the group total. The unit has a record order book of £91.5m for delivery over the next two years, significantly de-risking sales visibility. Ongoing projects include the construction of 104 affordable flats at The Wisp, Edinburgh with PfP Capital, and 144 homes at Dalmarnock, Glasgow for West of Scotland Housing Association. The two contracts have a combined value of £36.7m excluding follow-on work on a further 132 homes. The Scottish Government has earmarked almost £3.5bn for affordable funding through to March 2026, supporting demand for Springfield’s 4,200 plot strong land bank which has a gross development value (GDV) of £542m.

On the private construction side, completions surged 41 per cent to 593 homes at an average price of £244,000. Springfield’s 11,078 plot land bank has a GDV of £2.6bn of which more than half has planning consent and a further 24 per cent is in the planning process. The group acquired 603 plots in the year to replenish the sold plots. It makes sense to do so at this stage of the cycle given that house prices remain buoyant, rising by 11 per cent in Scotland in the year to 31 May 2021. Springfield’s private homes are proving highly desirable to house hunters, being more spacious and offering gardens and greenspaces. Such is their popularity, that 99 per cent of all homes at Springfield’s Villages have been sold, reserved or are under contract. These are standalone developments close to major cities such as Perth, Dundee, and Elgin. Around 25 per cent of all private completions were from Villages in the 2020/21 financial year, and they could account for around half in the new financial year.

The investment case is de-risked even further when you consider that Springfield’s private land holdings are significantly undervalued in its balance sheet. The group’s latest net asset value (NAV) of £111m (109p a share) includes inventories (land holdings and work in progress) of £157m. That’s an incredibly low carrying value for a 15,281-plot land bank. To put it into some perspective, the sale of 200 plots of land to two national housebuilders at the end of the financial year accounted for majority of the £15m increase in other income Springfield booked in its accounts. Moreover, with interest rates at record lows, and private housing demand outstripping supply, then both house prices and land prices should continue to trend upwards.

Source: London Stock Exchange.

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering for the 3.9 per cent excess application ('Exploiting a tender offer', 4 August 2021). Total return reflects this cash distribution which will be made the week of 13 September 2021.

Sensibly, Springfield continues to invest in its strategic land bank, acquiring 150 hectares of land at a site at Newton Grange in Edinburgh’s commuter belt for the development of 1,000 new homes. The strategic land was purchased for a bargain basement £2.6m, and that includes a farm house, too. A train station takes commuters to the city withing 15 to 20 minutes, so the location is ideal. The directors can continue to to do so as net debt was slashed last year from £70.9m to £20.8m, so balance sheet gearing is only 19 per cent.

Importantly, shareholders are being rewarded as the dividend has been raised from 2p to 5.75p a share including a final dividend of 4.45p, the pay-out covered 2.5 times by underlying earnings per share (EPS) of 14.4p. Analysts at Progressive Equity Research expect a dividend of 6p a share in the 2021/22 financial year, so the prospective dividend yield is just shy of 4 per cent. The estimate is based on EPS of 14.8p which factors in 1,057 completions with a higher weighting to affordable housing in the mix. Adjusting for the aforementioned land sale, Springfield’s underlying pre-tax profit is forecast to rise by 12 per cent in the current year. There’s certainly scope to make further land deals, but analysts have not factored them into their estimates.

Springfield’s robust trading prospects, solid asset backing and potential for both earnings and dividend growth were key reasons why I included the shares, at 135.6p, in my 2021 Bargain Shares Portfolio. The investment case is even stronger now given the high level of the group’s forward order book, and scope to release substantial hidden balance sheet value from land holdings. Analysts NAV estimates of 117p (May 2022), 128p (May 2023) and 144p (May 2024) only factor in the net profits retained after dividend payments (6p in 2022, 6.8p in 2023, and 7.5p in 2024), further highlighting the progressive value accretion for shareholders.

Importantly, Springfield also ticks the right boxes with its ESG credentials. Around 90 per cent of homes are timber built and utilise in house manufacturing, and half use environmentally friendly air sourced heat pumps. This gives the group a competitive advantage over rivals looking to adopt such build practices.

Priced on around 10 times earnings, offering a near 4 per cent prospective dividend yield, and rated on 1.3 times forward book value, the shares are modestly rated for a company that is forecast to deliver 29 per cent EPS growth over the 2022-24 forecast period. I maintain my target price of 220p. Buy.

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