One of the benefits of a public listing is that it provides a vital source of capital for businesses like Telford Homes. Indeed, since Jan’12 it has raised £70m in 2 tranches (£50m Oct’15 & £20m Jun’13) to develop thousands of desperately needed, high quality, affordable properties within inner London. In return, shareholders have seen PBT climb from £3.0m in FY12 to £46.0m today, and been rewarded with a 475% appreciation in the stock from 79p to 460p. Which, when added to 75p of dividends, equates to an average annualised gain of 34% pa.
However, there was always going to be a time when growth would moderate. Don’t get me wrong, we’re not envisaging a contraction. Simply a 2-3 year “consolidation” phase, whereby EPS increases at a more realistic rate. Namely +10.4% to 55p in FY19 (vs 49.8p), and thereafter by single digits. Before forging ahead once again from FY22, as Build-To-Rent (BTR) becomes a bigger slice, and margins revert back to through-cycle norms.
What were the key messages from this morning’s record FY18 results? Well, after a blow-out H2’18 - where PBT came in at £37.3m (H1 £8.7m) on revenues up 15.6% YoY to £216.9m (£99.3m) - management reiterated their confidence in achieving FY19 PBT of £50m+, implying a return on equity (RoE) of >15%. FY18 PBT at £46.0m (up 34.9% on LY) was slightly above consensus vs our estimates of £44.6m. Driven by 3.3% higher EBIT margins (adjusting for capitalised interest) to 16.7%, thanks to favourable sales mix, lower than anticipated build costs and 8.3% top line growth to £316.2m.
Telford has suffered a few planning delays of late - albeit we think the medium to long fundamentals of the capital’s housing market is supportive. London continues to build nowhere near enough homes to satisfy demand. In fact, according to the latest government data (source: MHCLG), annualised housing starts in the 32 London boroughs were ~17,000 units in FY17, compared to an average population growth of 85k pa between Mar’97-Mar’16, to 8.7m
More people are looking to rent - not just because of the elevated prices, but also increasingly through choice. Which is one of the reasons why BTR is such a neat solution. Offering quality facilities/service, security and in some cases extended leases to tenants, together with more communal/friendly environments.
Bearing all this in mind, we nudge up our valuation from 500p to 535p/share, based on the FY18 out-turn, and belief that Telford should be valued at least in line with its peers, who presently sit on ‘price : net tangible assets’ and PE multiples of 1.8x and 10.1x respectively.