Member Info for steph

Telford Homes as valued by the Graham Formula Technique

Current Price 420.5p Mkt Cap: $ 407.6m Implied Valuation* 1015.08p (141.4% undervalued)

Stockopedia assume a EPS growth rate of 10.65% to get to this. This is based on faster EPS historic growth plus some caution on 5 year forecasts by analysts. Thus a bit higher than forecast but much lower than historic.

Clearly the market not pricing in growth potential. More fool them.

cyber thanks for the 2013 reference. They did achieve EPS doubling in the following 5 year period but not units sold. Curious. HP inflation helped as average selling prices went way up as did margins.

Anyhow I'm happy to assume quintupling of EPS over 12 years and linked to that SP and dividends quintupling as well. If it takes 15 years due to 2 or 3 bad years then that is OK too. Most important is that TEF uniquely is posed for substantial year on year growth over the next 20 years and that makes the current SP too low.

I was wading through Buffet's principals and I feel certain that if he knew what we know about TEF he would be a major investor. Maybe 4.20 is not a bargain but the company has solid and long term growth prospects from here that are not priced in. It ticks all his boxes.

TEF is a get rich slowly play and todays SP is a pretty good buy in point. What the SP does over the next 6 months is anybody's guess but over 10 years this SP is going up substantially.

It is true that in conversations with me in 2 AGM's (open and private) the management have never clarified and I have never pressed what precise units are being referred to in "doubling every 4 to 6 years". I suspect a bit of constructive ambiguity is needed as it is not an official forecast contained in the annual statement and thus they need to be cautions to band about a precise prediction. Indeed the annual statement is 100% silent on forward projections for build or turnover rates.

Turnover or unit build rate is a reasonable interpretation. Slightly tougher to double EPS as that requires margins to be maintained. Of course it is EPS that has the effect of doubling SP and dividends not build rate or turnover on their own. That said margins seem to be holding up nicely in spite of HP inflation coming down. Control of build costs has made a contribution to that. Margins are bound to ease a bit over the next few years but maybe not dramatically -unless we get a deep recession again.

For me I predict a doubling of EPS every 6 years for the next 12 years. This probably implies a doubling of volume and turnover a bit faster than that of say 5 years. With a build rate of just under 500 for open market sales in the pervious year doubling and then doubling again build volume within 12 years is quite feasible. It will be just 2,000 open market sales and represent only 10% of the current London build rate and 3% of the London new build demand.

So for me and my ISA strategy doubling and then doubling again of EPS is what I have pencilled in. Towards the end of 12 years there may well be a shift in the dividend strategy to pay out more than 1/3rd as management allow TEF's growth rate to slow a bit. So I am hoping for a dividend of a quid in 12 years time (doubling and then doubling again of 17p divi plus a rise in % pay out to half of earnings from a third). More than enough for a very nice retirement income supplement. If it takes 15 and not 12 years still a very happy retired camper.

They said it in the after-reception. Worded it as confirmation of my doubling every 4 to 6 years phraseology (not as the implied EPS growth I have just stated) with caution on me hoping for anything faster than 6 going forward (4 was achieved between 2014 and 2018 so not imposisble) but a note that with build to rent opportunities it could be significantly faster than 6.

The crews can ramp up to meet an expansion rate on the lower end of doubling every 4 to 6 years. The constraint as always if finance and thus the availability of build to rent deals. There is a speed limit, though, of expansion of build capacity due to the in house nature of the crews. We did not pin that down but 4, for me, is a good guess. Faster than that means the training needed might get strained with knock on effects on quality and build cost.

There is a bias in the TEF model towards growth as keeping the crews together and motivated is aided by some expansion year on year as promotions are available for capable crew and administrators that normally would only be available by staff turn over and retirement. So a happy place to work for the ambitious. Quite a different business model to a builder who primarily contracts in the needed labour. Retaining 2/3rds of earnings fits this model for the foreseeable future.

Also foreseeable future for senior management is 5 years but also no reason to suppose the same business model for growth would not apply 5 to 10 years out and even 10 to 15 out. Depends on market conditions and that is our guess as investors equal in knowledge to theirs. They don't claim to be experts in anything but their core business and they do read our blogs from time to time.

There was a question at the AGM on innovative build techniques which is a topic close to my heart. Their answer was conservative. They participate in industry wide forums and are familiar with new build technology but will go with the flow and not be cutting edge or experimental in this area. They think they are too small to take the risk to be a leader on build technology. So if robots are developed to lay bricks (coming fast) and set steel beams and finish TEF is unlikely to be a first mover. I suppose that might change if the government had a construction sector innovation methodology initiative with large incentives and technical and financial support to tie into but what is the chance of that given our government melt down right now? Catapult is too small and underfunded to do this heavy lifting (forgive the pun) and there are no other government initiative about. Our engineering universities could partner on new build technology that might have export potential but that required a builder co-fund serious money and that is not TEF's role.

I went to the AGM and senior management seemed confident they can keep up a 12% EPS increase year on year into the foreseeable future.

The build to rent portion of TEF's activity can expand significantly faster than that as the normal speed limit for UK builders is funding. Building up stable and qualified crews and subcontractors to service build to rent growth can be twice that. Beyond that the need to expand construction capacity at a sustainable pace kicks in.

TEF Earnings Per Share shows steady and fast growth in line with 12% to 17.5% EPS growth and doubling in size every 4 to 6 years.

While our SP has grown much more slowly in recent years than EPS growth it is in line and has always been closely related to say morning star's assessment of fair value (currently 4.29) this assessment (very influential in fund managers thinking I would imagine) itself is derived from sector factors and averages and not TEF specific factors. For those of us that think most traditional evaluations misrepresent TEF's fantastic and sustainable growth potential TEF will, therefore, outperform it's peers. TEF is still for us, especially if you are like me looking for the longer term.

0.08 march 2009
0.14 march 2010
0.05 march 2011
0.04 march 2012
0.14 march 2013
0.26 march 2014
0.33 march 2015
0.39 march 2016
0.36 march 2017
0.49 march 2018

I do believe that the next few years (baring a deep recession) will see TEF SP growth "at least" roughly in line with EPS growth of 12% per year which due to the compounding effect means the company doubling EPS and size every 6 years. This is the most pessimistic scenario for me that has, say, a 20% probability or less. My mean is 14% EPS growth which over 5 years doubles EPS and company size. Only a deep recession will blow the 12% EPS growth off track and I don't think the odds of that are greater than 10%.

TEF EPS growth is not dependent on HP inflation. If we get significant HP inflation over the next 5 years in TEF's patch that will be windfall and either help out on the dividends or accelerate the future growth rate anywhere up to 17.5% which is historically the speed limit of EPS growth with the company doubling in size every 4 years (compounding effect).

With the build to rent strategy expanding to 50% of the portfolio I think 12% EPS growth is comfortably achievable in a flat market. That is where London comes in. Even in a flat London market demand far outstrips supply year on year. No chance of no market for TEF's product in London.

IN terms of TEF being held back by market sentiment that is a real factor on our SP now and in any future. However trading at some 4.20 when your own calculations of underlying value have indicated something like 5.8 is quite a gap already due to market sentient and not company specific prospects. Yes market sentiment can worsen from here and the gap will temporarily increase a bit but we will still be company specific performance related and natural EPS growth will counterbalance all but the most severe worsening of market sentiment.

Of course market sentiment can brighten as well. I am expecting that after all of the huffing and puffing about Brexit some from of stability will return within a few months and that will help. We are in a dark news cycle phase of Brexit posturing. Even Trump impeachment might be positive on the markets as history has shown.

I do believe the low interest environment all western countries now have will last for 20 years and has changed the dynamics of a bull run and property prices. Low interest rates have permanently inflated stock and land assets and both, therefore, have room to run a bit further after a pause. You look around the world and asset bubbles are popping up in Australia and Canada as examples only to be hit by punitive taxes to beat them down. London no longer looks expensive -especially when the exchange rate is factored in. It is like a finger in a dyke. It is low global interest rates that are causing it.

So even in a lacklustre market we are likely to still have some HP inflation in London and this flatters our EPS. The day someone tells me that London's rate of jobs growth within the well enumerated knowledge economy is reversing itself is the day I will sell TEF. Until then I am all in.

notoriously hard to call this SP within 20%.

For my money I have been topping up of late. 20k in my isa last week and now some in a spread as well. Yes we might dip again on Brexit volatility as march 2019 approaches. Still upside potential greater in my opinion than the risk of a dip -even over the next 12 months.

Bit nervous about a sudden general market correction though. TEF will ride that out and recover value quickly so as long as I can hold long enough not a problem.

Once we have stability in our external uk trading relationships this will fly. We have been 4.92 2 years ago when the company was significantly smaller.

https://www.telegraph.co.uk/business/2018/07/30/business-consumer-confidence-solid-economy-takes-priority-politics/

Personally I find it amazing with all the political uncertainty about but welcome never-the-less.

IN line with an analysis that London (and thus TEF's market) at least will muddle through in almost any political scenario -baring a crash out of the EU March 2019 (and the odds of that are still only 10% in my book).

Where we would have been without all this political nonsense is frustrating to think about but at least the bottom has not fallen out -yet.

agree with too much uncertainty about is hurting our SP.

TEF's forward sales help. Most, but not all, of increased EPS for a couple of years forward locked in so unless this uncertainty lasts for 2 years or more we can ride it out. EPS projections were based on zero inflation so we have some room to have a challenging sales environment for a couple of years before any downgrades in EPS growth are needed. Short term TEF EPS growth pretty certain -baring a real hard recession which I'm not predicting unless we jump off a Brexit cliff edge in March.

Build to rent growth likely as buyers thin, Indeed already evidence of inflationary pressure for rentals as individual buy to letters withdraw stock from market -so in a sense for TEF growth in build to rent market balances decline in flats sold to individual investors.

I wish we did not have this uncertainty about but we are where we are. Neither May or Corbyn are good leaders for our times. Neither has a strategic vision of how to handle Brexit and even if they did neither are good communicators. Neither preparing the public for the compromises and challenges ahead needed to realign our basic trading relationships. A bunch of economically illiterate charlatans in Cabinet and even worse on the back benches Curse the lot of them.

May had the poor judgment and lack of a brain to follow Nick and Fiona's utterly economically ignorant advise on her speeches just after the Brexit vote promising red lines that are utterly incompatible with the frictionless trade she also promised. Now the hard Brexiteers are holding her to her word and not without justification. As a nation we are suffering for the slow education in basic trading economics of the whole lot. Possibly only since Lord North lost the Americas has Britain been so poorly served by her Parliamentary leadership.

https://www.telegraph.co.uk/business/2018/07/25/fewer-city-jobs-will-move-europe-brexit-day-bank-england-believes/

As the evidence rather than forecasts come in it does seem that Hammond's concept of loss of passporting but UK-EU agreement for mutual recognition with a longer fuse than 30 days is a runner. London has reached critical mass and probably can take the loss of passporting in it's stride. The size of London's business and financial sector has always been limited by the book risk in proportion to the GDP. Get above 3.5x coverage and nations get nervous and for good reason as Iceland and Ireland found out. Get up to 7x (pre crash Ireland) and warning lights flash. Get up to 10x and the country can go bust (Iceland).

London losing a few jobs in the sector to EU jurisdictions where trade is booked and thus oversight must take place actually allows London to keep within it's maximum book value vs GDP the government feels it can tolerate. Carney has said that with all his fantastic management of financial risk over the sector we can go to 7x. That would be a huge expansion for current job levels. So if we are lucky it might be swings and roundabouts on the city job losses. Lose a few regulatory oversight jobs but allow us to grow global market share without betting the farm.

Good for TEF if indeed the impact on business and financial services is as mild as this. It is ironic, almost divine retribution, that the regions of the UK that are now emerging as most likely to suffer substantial losses from Brexit are those who voted most heavily in favour. Corbyn sounding more and more like Trump with their utterly naïve and nativist industrial strategies in a modern interconnected supply chain world. One is a malevolent idiot and the other a well meaning idiot but the result is the same. Left and right marching together towards industrial disaster.

I do think the builders who piled into the midlands on the back of what I think was a temporary blip in demand are chasing short term strategies.

As TEF said at their AGM London has a very diverse economy and a chronic homes shortage. TEF's in house skills based model allow them to outperform an out of London builder whose contractors to build are based too far to commute in. Does not work the other way. London based builders are expensive if you have a contract in Manchester or Leeds. Need to build up a whole new team and that is a long term strategy. So the difference between London and the regions will not be quite Hunger Games levels but the disparity will likely grow.

We are in for some volatility related to Brexit negotiations and the crash out scenario as the deadline approaches. How much TEF's ever growing good news story can fight that headwind I don't know. I suspect we will hold our own until March and then we either go sharply down or jump sharply up depending on what happens.

https://tradingeconomics.com/united-kingdom/corporate-tax-rate

I know it seems strange but the "radical" corbyn is only saying he will return corporate tax rates to a level that would be considered historically low. Corporate tax rates reached 52% in 1982 under thatcher and were above 26% for most of Cameron's coalition.

Of course Corbyn and MacDonald might be secretly planning much more radical tax changes than they are saying. However for the moment and for my money I don't see a Corbyn government as a threat to TEF's SP. Indeed they have won some cautious approval from the business community for their economic policies. If there is a dip on a Labour election I'll consider that a buying opportunity.

We all have our different preferences for political parties. I find it healthy my views are challenged on political risk for our SP as it is not a science guessing what politician might do if in office and thus benefits me (and I hope others) from a wide debate.

At the moment for me the Tories are underperforming against my expectations that at least on economics they were a sensible lot "conservatives" in substance and not just name. As an investor "conservative" is generally good. It is predictable even if not a personal preference. We have a funny situation where the Tory's are radical on economics with regards to our basic trading relationships and radical left wingers are closer to the establishment views of what to do. Strange times.

never claimed Corbyn would be good for our SP although May government giving him a run for his money on that score.

He may be hard left but the actual financial proposals are pretty tame and I would not be predicting a crashed SP if he gets elected. We have had higher income tax rates under Thatcher and survived.

Crashing out of EU a big risk though and I do believe COrbyn is playing party politics on that one rather than doing what is right for the nation. It was always best to have some form of national unity government to negotiate Brexit. Not been offered by Tory or Labour though. These wafer thin votes on key elements are not the way to do something of such fundamental importance. Churchill with a comfortable majority went into formal coalition with real socialists (in favour of immediate nationalization of industry) for the duration of the war. May is no Churchill though and lacks the imagination on how to move forward with this.

Trump and Brexit. International risk and national risk.

If only we could just ignore the politics but alas there is a large effect on SP -at least in the short run. We'd be over 5 quid if the politics were more normal.

Risk of a crash out and the general sharp decline in all UK shares that will result (although logistics companies might make extra money out of the chaos) is rising with the wrecking amendment accepted by May. I'd still put it at under 10% as a risk but that is up form 5% only a few weeks ago. Was not my cup of tea but May had the beginnings of strategy at Checkers but that "strategy" lasted only 10 days. Back to political gridlock.

A truck stuck in a border queue is a truck still making money -if they can pass the cost onwards under the contract structures. Just being stuck for 24 hours roughly doubles the fleet needed for flows between the EU and UK. Twice the fleet twice the cost and twice the earnings. Lovely Jubbely. We need Del Boy and Rodney to go into cross border trucking. Maybe skipping the queue by trying to bribe the customs officials or driving across a field to get to the front.

I did attend the AGM and can share the following observations:

1) for those of us that see TEF as a long term investment the fundamentals are as solid as last year. The company will continue to grow at a good clip doubling in size ever 5 or 6 years under current market conditions.

2) build to rent does offer the opportunity to grow faster as financial constraints are lifted. There is still a speed limit though which is the ability to ramp up TEF's build capacity which is based on a lot of direct Labour and not contractors. To achieve a guaranteed quality and construction price efficiency one can only expand the TEF teams at a certain pace. This potential is probably faster than doubling every 5 to 6 years but the company will probable choose not to go faster than that depending on the details. What the means to go faster (than doubling every 5 to 6 years) does do, however, is make doubling every 5 or 6 years a more solid objective.

3) The build to rent opportunities to fuel growth seem to have put any need for further capital raising into the long grass. Absolutely no point if construction capacity is the new speed limit not finance.

4) Housing associations remain an important part of TEF's business model and an important part of the risk management in case we need to ride out anouther deep recession In a deep recession it is expected in one way or another the government will fund the housing associations to build and TEF will pick up, as it did in the past, a disproportionate amount of that recession proof business.

5) TEF is a long way from considering that it is the right maximum size for the London Market. It will continue to grow at a fast pace compared to other builders into the foreseeable future.

6) TEF really do not look more than 5 years ahead but if the business model works and there is no change in market conditions it is fair to assume what works for the next 5 years will be repeated in the 5 year period after that and so on.

7) Personally I think TEF can get over 5,000 homes per annum before there is any case at all to slow down. That would be just a 1/4 of London build rates and 1/12th of estimated London demand. Once TEF choses to slow down of course they will return a higher percentage of the earnings in dividends which for me aligns with my ISA objectives.

8) barriers to entry are high enough to preserve the market opportunity for TEF into the foreseeable future but low enough for TEF to operate and make money. In short a sweet spot.

9) TEF management believe the London market is more diverse and stable than any other UK regions. . TEF do not want to chase temporary opportunities in the regions. This is especially true given their business model to not rely on contractors but to build a direct TEF labour force. This takes time.

I've always declared I am pro EU membership for reasons that have nothing to do with economics. I like for me and my kids to have EU citizenship. Does not make us less British just in addition also part of a larger chunk of the globe.

I do try to not let my EU views cloud my economic analysis on the TEF impact. IN line with all major economists I predict that there will be no short or medium term benefits and quite a bit of missed opportunities. However I have never said leaving was a catastrophe economically and have long expressed the view that London will muddle through due to inherent economic strengths only partially affected by Brexit.

There is a rosy scenario possible but it is not likely. If we can get more or less full EU single market access and in addition have freedom to sign trade agreements we can be the middle country between USA and EU or China and EU where industry or services that trade both ways would have preferential economics. EU well aware of this and unlikely to let it happen but in the melee that is about to come up as the deadline approaches they might get bounced into a bit of this.

https://www.telegraph.co.uk/business/2018/07/08/uk-still-top-location-financial-services-investment-banks-await/

We have not left yet but still London so diverse and strong as a jobs market that it can take a bit of political nonsense for a 2 year period of time. Reminds me of Hong Kong who withstood even more political nonsense than London and kept growing post Communist take over.

I did notice that house prices in parts of TEF's patch have decreased a bit in nominal terms in the last 12 months. Flat in SE16 I sold just after Brexit vote has definitely gone down in value by nearly 10% since.

I suspect this is temporary due to political uncertainty that may clear when the politics improves. Still not helpful. TEF can hit our targets on growth and profit but need a stable housing market to do so. Stable defined and no nominal price decreases of any consequence for any length of time. A gentle temporary easing does not qualify but we need good news on the political front soonish.

May's half way house between a hard and soft Brexit is probably a dead parrot but indicates a direction of travel that is promising. Only 3 months left for that to evolve into something that stands a chance. Still a lot of cake in the position but not the fantasy of full access with no obligations that was peddled previously by May and key Brexiteers.

Jettisoning some hard Brexiteers is probably inevitable and should have been done sooner. Boris's journey from London Mayor speaking up for the single market to Brexit rebel who now says this is vassal state territory is shamelessly pandering to the party base and not engaging with the practical difficulties of leaving the EU.

Nigel is a shallow populist and has never claimed to have a post Brexit plan but Nigel has never been a Minster of state either. With power comes responsibility. Boris and others have yet to accept that.

topped up a tad based on my feeing that the politics is a bit more stable and Sain's feeling we are to receive good news soon.

For any long term holder sub 4 quid a bargain. Might still bounce up and down from here in the short run though.

https://www.theguardian.com/us-news/2018/jul/08/trump-administration-opposes-breastfeeding-resolution-report

the UK public aligning with US standards for personal health, food and animal welfare rather than the EU's is a non runner. US agribusiness is a heavily subsidized mafia (look at US agricultural pricing for scarce water rights) best to keep a polite distance from.

Trump is actually being very helpful to a soft Brexit by supporting a hard one.

Market opens in 3 minutes so we shall see. I predict stability.

not chaos but not as helpful as all 7 cabinet brexiteers signing up to at least asking the EU for the UK to staying the common market for goods.

I still think overall, David resignation included, the last few days have been helpful for the builders and TEF. IN some ways a bit of theatre with high profile resignations helps May negotiate with the EU as they know she can't offer too many further concessions on sovereignty issues. Better odds of some face saving fudge.

The white paper is some ways from EU acceptance and will need to evolve further.

I think the direction of travel is an initial very close alignment that is followed by a theoretical ability to diverge slowly. Very tricky to negotiate and no template exists and time is now short.

Given 40 years of supply chain and regulatory alignment it was always foolish to suggest we can undo it in a short period of time. A "full" Brexit will take time as it means rebuilding our regulatory and trading relationships. In any case the EU's food and animal welfare standards are in line with the British public's desire for such standards as is much else that Brexiteers have labelled as "a Brussels imposition". As a nation allowed to diverge we will likely keep most of the EU standards anyway. Brexit is to me a lot of pain for very little gain.

The partial is also not the enemy of the full -unless one is a Brexiteer who is insecure that the UK public want to diverge further and wants to "bounce " us into a fuller brexit than a future voting majority would ever support.