Priced for a profitable outcome

Sheffield-based Henry Boot (BOOT:275p), a leading land development and construction group, continues to deliver significant shareholder value even if the current share price fails to reflect this.

In the first half, the group increased net asset value (NAV) per share by 11 per cent to 297p and delivered a return of capital employed of 10.1 per cent, a material improvement on the same period of 2021. Buoyed by residential land sales and industrial development activity, the group increased pre-tax profit by two-thirds to £38.8mn, thus materially de-risking Peel Hunt’s upgraded full-year forecasts that point to underlying pre-tax profit rising by more than a third to £48.2mn. The balance sheet remains in robust health with net debt of £42.8mn equating to only 11 per cent of net asset value (NAV), at the bottom end of the board’s preferred range (10 to 20 per cent).

The bumper first half result was partly buoyed by Hallam Land which reported 16 per cent higher operating profit of £17.2mn selling 3,447 plots across six locations. The land developer still edged up its land bank to 92,981 plots, over 10 per cent of which have secured planning consent, a fact that is not reflected in the group’s reported NAV per share as any increase in value is only recognised on disposal. Importantly, Hallam Land’s trading outlook remains positive. In fact, the division has already unconditionally exchanged contracts on 1,282 plots for completion in 2023 and 2024, including a significant transaction with Cala Homes in Tonbridge, Kent.

In the first half, Henry Boot’s property investment and development division more than doubled its operating profit to £19.6mn, the key contributor to the eye-catching results. The unit completed four developments with a total gross development value (GDV) of £51mn, including two industrial warehouses, one of which was sold at a 23 per cent premium to book value. In total, the committed development pipeline has a GDV of £343mn, with almost three quarters pre-let and 97 per cent of development costs fixed. The focus on industrial and logistic space (£164mn of GDV) and low-cost residential (£65mn) de-risks the investment case as does a conservative approach to pre-letting developments.

Furthermore, the group’s £134mn investment portfolio produced a 4.6 per cent six-monthly return driven mainly by rental growth. High rent collection rates (98 per cent), an unexpired lease term of 15 years, and improving occupancy rates (up from 85 to 92 per cent) are all moving in the right direction. The same is true of the group’s Leeds-based premium housebuilder Stonebridge. Around 96 per cent of this year’s 200-unit sales have already been secured with average selling prices of £512,000 around 11 per cent above budget, thus offsetting 9 per cent building cost inflation. Stonebridge’s management has yet to see a reduction in end customer demand for its homes. In fact, it has already secured buyers for 23 per cent of the 250 units that are planned for 2023.

Based on forecasts from brokerage Peel Hunt, Boot’s shares trade on a current year price/earnings (PE) ratio of 9.6, offer a prospective dividend yield of 2.4 per cent and are priced on an 11 per cent discount to 12-month forward NAV. Having buying the shares around the 283p mark in my 2022 Bargain Share Portfolio, I feel the current price represents an excellent entry point to gain exposure to what remains a well-run group that has a track record of delivering. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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