Back in 2012, I stupidly sold shares in Telford Homes - a specialist builder of affordable homes in ‘non-prime’ London boroughs. Happy enough at the time to pocket a >100% gain, only then to watch the price triple over the next 3 years! I should have concentrated on the Capital’s excellent fundamentals. Namely a chronic lack of affordable housing, augmented by robust demand from UK/overseas buy-to-let (BTL) investors, and more recently ‘Build to Rent’ (B2R) institutions – all desperately seeking income as bond/gilts yields remain locked at near record lows.
To us, the fundamentals are definitely positive: something not lost either on the Board, who last year kicked off a major strategic initiative of controlled expansion. They are taking advantage of cheap bank lending to reinvest in growth, especially within the buoyant B2R sector. All told, aiming to more than double revenues and net tangible assets (NTA) per share over the next 5-6 years.
Moreover, this expansion is to be achieved using comfortable levels of gearing, and without becoming overly dependent on any single customer type. Indeed allied to ongoing stable demand from individuals, we estimate that ultimately >50% Telford’s turnover will be come from Institutions and Housing Associations – who generally have longer term time-horizons and are less affected by temporary lulls in the economic cycle.
But that’s not all. Given the £580m forward sales position, the company has extensive visibility, with this morning’s interims coming in almost exactly as per our forecasts, and in line with what the management indicated at the trading statement on 11th October. Importantly too, the firm said it was on track to exceed FY18 PBT of £40m, and £50m for FY19 - having already bagged orders worth >95% of this year’s gross profit (vs 80% at prelims) and >65% of next’s (60%). The total development pipeline is worth £1.4bn (£1.5bn March) – equivalent to nearly 4,200 units, of which 3,000 have planning consent.
As a sign of the Board’s confidence the dividend was hiked 11% to 8p/share, and is predicted to reach 17p by the y/e - implying a 4.3% yield and a 36% pay-out ratio, which in turn should normalise at around 1/3rd in future periods. Bearing all this in mind, we have broadly held our PBT forecasts for this year and next at £44.0m (vs £43.5m before) and £51.9m (£52.4m) respectively.
We think Telford shares should trade on a rating not too dis-similar with its UK peers, rather than on today’s skinny ‘price:net tangible asset’ and PE multiples of 1.3x and 8.5x. Consequently, our analysis implies that the stock is worth 500p/share, when using a range of benchmarks and discounting back at 10%.
we shall be interviewing Telford Homes’ Management next Wednesday, Dec 6th. If you have any questions to raise with them, please send them to [email protected]