Member Info for strictlybricks

Just for the record, Sain, as this is sounding like a variation of the curry contest on the blog, are you suggesting:

Bellway 1,550p
Redrow 290p
Crest 200p
Telford ???

by the end of 2019..?

Strictly

Cyber,

"I would add that there's a responsibility on Directors to ensure a high valuation as an undervaluation can attract takeover interest. I've seen many takeovers where an undervalued company gets sold for 10% above the first offer."

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I think that's a valid point, which I would say applies even more so a few leagues to the west, over at inland Homes in Buckinghamshire...

Per the June 2018 figures, they have 6,870 building plots, and the land-cum-part built houses, etc., is valued at £136m, close enough to the balance sheet value of £142m as not to be worth arguing about for my point...

The market cap for Inland right now is just £103m, which means you can buy a bucket load of building plots in the south of England for about £15k a pop...

Most of them don't have planning consent as yet but, Brexit, no Brexit, that still seems like bargain basement territory to me for any sizeable builder wanting to up their game once there's a clearer picture out there..?

I have to declare an interest - as I do have a holding of Inland Homes.... not as big as my Telford holding, mind.... but I wouldn't want to be accused of ramping..! :-)

Strictly

"...because one day, Rodney, they are all going to be very rich."
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Terrace, your last line made me smile, but it may be that you and Sain have slightly missed my point (my fault - perhaps I shouldn't have used such a naff parable?), because I was very much aiming to highlight the value of Telford now, rather than posing a negative, while also making the point that the disappointing apparent share price performance is almost everything to do with the comparison with previous price high spots, one of which was ridiculously high.

So, if we put soppy house names and Del Boy to one side, another way of saying this would be that Telford has dropped in price, as measured against value, from 4.0 x book value to 0.95 x book value.

In other words, a fall in price on that measure of over 75%, which puts it in a league of it's own, as other builders are typically down on that measure by up to around 50% - meaning their share prices would have to HALVE AGAIN FROM HERE to match Telford...!

And this for a company that has increased its BVPS, since the pre-crunch high, by more than any other builder that I'm tracking.

You may want to check my numbers but, if you accept them, the two statements really don't make sense side by side, do they...?

I mean, the company that has performed by far the worse on one measure has performed the best on another.

And, as Telford investors, ceterus paribus, that seeming contradiction is very much in our favour...

Strictly

Steph, Sain, Terrace, Cyber et al,

To try to put what's being discussed on here lately into some sort of different context (which may or may not work..?), let me attempt a parable...

It is a kind of summation of a post I've just written on the Strictly Bricks blog, which most of you have access to and therefore may have already read? (I don't think you're on it, Steph - but you're welcome to join it if you can give me an email address to send an invite to either on here or via one of the others named above if you have their email addresses...?)

For the purpose of hopefully making some sense out of the parable, please take every thousand pound of house price as being 1p of either BVPS or share price, and take 1.5 x BVPS as being the fair current price for the houses at any time - because that's the long term average of what's been on offer by the market going back decades.

...........

There is a road named Builders Lane..

The names of some of the houses are Telford Cottage, Bellway Nook, Redrow Villa, Crest View and Bovis Beachhut.

You get the picture...?

We all of us live in this road, and none of us wants to move away from it... in fact, some of us don't even want to move out of one particular house - which is Telford Cottage.

Of those of us who are happy as long as we're living somewhere on the road, any of the other houses would do at the right price...

Well, perhaps not Bovis Beachhut, as that's had one or two dodgy previous owners and we don't know what we'd find once we started doing some DIY there.

In 2007, when the houses were all worth £170k, an offer was made for Telford Cottage of £430k, i.e. 150% above market value.

All the other houses were also a bit dear then, but Bellway Nook could have been bought at the time for £220k, i.e. a whole lot cheaper, with a big profit to boot if you'd sold Telford Cottage in order to buy it.

Then, in 2015, the houses were worth £320k, and there was an offer for Telford Cottage of £490k.

And, this time, it could have been sold then Bellway Nook bought for £380k.

And, right now, The houses are worth £485k, but the market is only offering £307k for Telford Cottage...

So, unless you think Armageddon's just round the corner, it's probably not a good time to sell and especially as all the other houses in the road are dearer than Telford Cottage right now.

And I think the likes of Cyber and me, who are happy to live anywhere in the lane (apart from Bovis Beachhut, that is...) would say that if you'd wanted to take advantage of a silly offer by the market, yet stay living in Builders Lane, 2007 or 2015 were the best opportunities to have done it....

Otherwise, if you chose to stay put, you've had to wait a rather long time for the value to catch up with those sort of prices...

And now you've still got to wait for the price to at least catch up with the value..!

Strictly

Steph,

I think agree with you about the "Brexit means Brexit" slogan.

It's probably on a par with Shrek's "It's our currency too" line, which was oft-repeated in the run up to the Scots independence referendum, and which was probably contributory to his losing that vote...

Hopefully you're right in your assessment of the share price and the next two weeks... I had some thoughts earlier that relate peripherally to that, following on from a long post I've just put on my own blog on the weekend, that I may put on here later today...

Strictly

Terrace,

Could be worse....

I mean, imagine being a Bitcoin investor...?

(if, indeed, the word "investor" is an appropriate one to put after the word "Bitcoin"..?).

Strictly

Steph,

"So a new company with all costs and no sales will in its year end accounts look like it is losing money for a few years."

To deal with your point in general terms rather than trying to be builder-specific, and taking your example above, the company you've described won't LOOK LIKE it is losing money.

That's because IT IS losing money, by virtue that it has costs but no income.

But those costs don't include the purchase of any stock (other than write downs because it's out of date, or whatever - I mean, a butcher couldn't keep carrying his stock over, could he? He'd never have any repeat customers as they'd all be dead from severe food poisoning... :-) )

So, ignoring my flippant example above, value of stock is carried forward to the next year as an asset on the balance sheet rather than a cost on the P&L.

And for a builder, all the value it has put into a part-built property is an asset - it's not capitalised and put into fixed assets as it would be if this was an improvement to office premises, but it is treated like stock and put into current assets.

More controversially, perhaps, as we're on this tack, as an investor I disregard all fixed assets on a balance sheet.

After all, if they're in the fixed asset section then, on the whole, they're there to be written off at some point rather than sold, aren't they..?

So, if a company is growing its fixed assets significantly year on year - and especially if those assets are intangible (look at Barratt's balance sheet for a big boy on that one) - that is a warning bell to me and for my purposes reduces the practical level of profit/net assets accordingly.

And I know I've referred to Barratt above but, on the whole, house builders are fixed asset light...

And I regard that as a very good thing!

Anyway, hope you don't feel that I was trying to teach you how to suck eggs on my earlier point and, if it wasn't clear before, hopefully that's helped...?

Strictly

Terr,

I think you're correct there....

Telford changed their accounting policy in 2008, such that they went from recording profit at the point of exchange of contract to recording it upon completion...

Without going back and checking (it will no doubt be in the 2008 accounts on their website) this may well be down to a voluntary change of accounting policy rather than a statutorily required one - but no matter, as the outcome is the same.

At the time, this took their book value down from 171p to 132p, so it was a pretty big deal IMO - but the market didn't seem to bovvered about it.

But it did mean that, if you wound the reduced 2008 BVPS figure back into previous years pro rata going back to the start, the price to book value did reach 4.0 in 2007 - which is a figure I've not seen before or since for the house building sector.... certainly not the companies I track, at any rate.

Nobody else seems to have ever commented, here or elsewhere, on that 4.0 PBV though - perhaps it just evidences that I'm a bit of an anorak with this stuff..!

And, as a final thought here as there have been a few comments posted today, I was happy with JDS's outlook and current trading comments in today's report and also on the broadcast (that you kindly posted the link for, thanks) and I am hopefully in the process of buying a few more TEF shares (which I've just sold to Crest to pay for).

And Telford was already by some margin my largest holding currently.

Strictly

Terr,

Yes, as Winston Churchill used to say, Telford just need to KBO (keep buggering on... he wasn't saying it about Telford, of course, but you know what I mean...).

No doubt there is an added frustration for very long term holders of Telford shares (and I'm guessing that would include you?) in that the market got an absolute stiffy (and that is a stiffy, not a steffy - it's not a typo) for their shares back in 2007, no doubt because Telford were going through a very sweet period of profitability in that early stage of their life such that their ROE had averaged over 30% since 2003.

But, surrounded as I am by a sea of spreadsheets on this sort of stuff, it's pretty easy to see that these sweet periods do occur for different builders at different times.

To merely notice that that happens is useful - I don't think I need to speculate on why.

Persimmon are currently in one.

By happy coincidence, it happens to align with the timing of their big boy bonus scheme for the (now departed) boss.

But the market hard-on for Telford back in 2007 took its price to book value right up to 4.0...

I've mentioned that here before.

The point is, these sweet periods for builders haven't lasted, and they have tended to revert to more of a norm in due course.

And when they do, the PBV has tended to revert to the norm too...!

And if you're a phlegmatic, long term investor, I suppose this doesn't matter so much - but on the whole there ain't so many folk like that around as far as I can tell..?

But if Telford's PBV hadn't gone up like that, the share price in 2007 would never have reached 200p, and if it hadn't gone above a PBV of 1.5 in 2015, the price wouldn't have gone above 300p then.

And no doubt that would have made for a somewhat less bumpy ride.

But share price volatility is what this investing-in-housebuilders'-shares malarkey is all about - and thank goodness for that, as no doubt otherwise the world and his uncle would more easily be able to see what cracking long term value it is...

Especially when compared to the FTSE100, which has gone virtually nowhere in nearly two decades - for reasons that are very clear if you're prepared to dig into it a bit.

But it does mean that the musketeers, such as yourself, have to live with this volatility to a greater extent, I would say, than tarts like myself who look to jump ship when it all gets too warm providing they can see value elsewhere.

But, to round this off, I do see Telford as probably now being the best value it's ever been outside of the credit crunch period, and I also see it as being currently the best value of all the shares I monitor with the possible exception of Inland?

But Inland's too illiquid, and also, frankly, less knowable and transparent, for me to have more than a modest number of their shares - and so Telford, by some margin, is currently my biggest holding.

So take that as a vote of confidence in them, if you like...!

Strictly

James et al,

You made a pithy remark that "macro always trumps micro" and, providing you mean in the short to medium term, I fully agree with you on that, as does Warren Buffett - his version being that the market in the short term is a voting machine but in the long term it's a weighing machine...

But, to hopefully bring a bit of positivity here as the collective ensemble of the TEF share chat regulars seems to be deep in bunker mode with helmets on at the moment, let's get a bit macro rather than micro about share prices.

The long term average "exchange rate" between cash and sensible house builders has been a PBV of around 1.5.

That's what it was before the crunch and that's what it's been as an average since the start of 2013 which is about when I reckon that normal service was resumed in terms of house builders' profitability and share pricing.

And, also, my record keeping has been somewhat better since the start of 2013, so I can speak with some confidence about this period.

I take a PBV of overall holdings at the end of each month and the current figure is 0.98 which is the lowest it's been in six years.

But if we work on the basis that whatever profit or loss each builder makes over the coming years from here, the exchange rate is likely to continue to float up and down through the average of 1.5 PBV, surely that of itself is a reason to be cheerful..?

Whatever happens with Brexit, do we really expect it to be worse than the Credit Crunch?

If not, there are some numbers to brighten our day...

If we go to the pre-credit crunch BVPS highs, and ignore the subsequent dips, I think we can get a clearer picture.

And, on that measure by my calculations, Bellway is best in class by a country mile as its current BVPS is 181% higher than in March 2007, followed by Telford as runner up, with their BVPS 136% higher.

Persimmon is a close third, at 132%, but then you still have to pay an eye-watering 2.1 PBV for their shares.

And, as for Barratt and Taylor Wimps, their BVPS figures are both still under water... yet their PBVs are about 50% more than Telford - what is THAT all about..?

I'm rambling a bit here, for a change, but my point is that the credit crunch was a pretty big nasty, and while the sensible builders' profits were shaken rather than stirred for a few years, they got it sorted and moved onwards and upwards from there.

And maybe we're in for one or two duff years now, but history shows that companies with strong balance sheets get through it quicker, and then it's a matter of waiting for the weighing machine to give the voting machine a good kick in the nuts!

And if it does happen that the builders make dismal profits for a couple of years, once a sensible PBV returns again, surely it's not such a huge deal in the scheme of things?

Strictly

Steph,

I think I can distill that down to a single line that nearly 20 years in this game has taught me....

Which is:

I'm more fearful of being in cash when I should be in shares than I am of being in shares when I should be in cash...

I could just pad that out a tad with a couple of provisos...

This is in respect of builders shares, not other sectors, and it doesn't apply to heavily leveraged companies!

Strictly

Terrace,

For the most part, I would agree with you on the historically cheap view - with the exception of Persimmon.... we still have to see if any accounting "surprises" manifest from here seeing as they're through their now infamous "big fat bonuses for the big boys" period....

But, historically, a PBV of 2.1 for Persimmon, judged solely on that indicator, ain't exactly bargain basement IMO.

For the rest, they are even slightly cheaper if you use estimated current book values rather than end of last accounting period numbers...

I've got Bellway at 1.31, Redrow at 1.23 and Telford at 0.91.

Picking up on James' comment yesterday, it all feels a bit like 1940, but without the bombs, at the moment, doesn't it..? (not that I was around in 1940 to know..! :-) )

Strictly

Sain,

..............................

"I would be very surprised if the majors are still experiencing 6/7% growth by 2021.The market seems to be saying they wont"
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Well, that's kinda my point....

If we ignore the scribblers, and if no-one else is putting up any numbers here then, as far as the discussion here goes, you're just left with that mad ba..ard, the market, for guidance...!!

And, to that, I'd say "Rather you than me, Gunga Din..."

In the nicest possible way, of course....

Strictly

Steph,

Perhaps you and I aren't going to agree on this but, IMO, it's the growth of the bottom line that matters in life, not the top.

And, if I take the scribblers' figures, rather than postulate my own, they have EPS growth penciled in for Telford for 2020 and 2021 averaging 5% a year, compared to Bellway averaging 6% and Redrow averaging 7%.

Not a lot in it, in other words...

But, on my reckoning, Telford would be coming from a 2019 ROE of only 18.1% compared to Bellway 21.5% and Redrow 22.1%.

Those gaps might not seem much, but compounding makes them significant.

And there seems to be a lot of emotional investment in Telford here on this chat as well as of the folding stuff kind.

So, while I tread cautiously here in mooting what might be taken in some quarters as being a slightly off-note, I would add that I myself am currently an investor in Telford - which surely implies I see relative current value there..?

But, for the purposes of the share chat here at large, unless someone's prepared to stick their neck out and say the scribblers have got it well wrong, I think that means, providing we do take the cold, hard, essential numbers into account, that now and into the scribbler-projected-future, Telford doesn't kick quite as hard as Bellway and Redrow where it matters and, for me, that means a lesser book value weighting for Telford than either Bellway or Redrow.

Still well above Bovis, of course - but then, we don't talk about them...!

And the market is currently, IMO, now slightly over-compensating for that (Telford I mean, not Bovis...), whereas in the spring, again IMO, it was slightly under-compensating for it...

It was also, certainly up to the takeover rumour yesterday in the Torygraph, over-compensating for the rising damp in Crest's recent update.

Again, IMO, of course...

But, to go back to the beginning, you and I may not agree on this.... however, as long as we disagree with each other politely, I think that's okay... :-)

Strictly

Steph,

Earnings are one thing but profitability is another... and it's easy to miss the second if you don't lay your spreadsheet out appropriately...

And for Telford, for the subsequent three years after this cycle's high spot in 2014 of an ROE, by my reckoning, of 18.9%, that percentage then drifted downwards each year to 14.6% for 2017.

That was in marked contrast to Bellway, Redrow, and, dare I say it, Crest, through that three year period.

There was a substantial upturn for TEF for 2018, which was an ROE of 19.4%, but one swallow does not a summer make and now, with all the uncertainty around - and about which you have generously given your time to discuss at length and I think it's fair to say that your savvy on all this seems to be of a different calibre to the rest of us here - there hasn't perhaps been enough unfolding of figures and prospects at TEF yet for sufficient clarity...?

Do bear in mind that, relatively, TEF had a good start to the year share price-wise, and for our light-hearted curry contest on the blog, I'm sure there were more smiles in the musketeer corner, and, as things stand, Telford's share price drop, with divs re-invested, is now level pegging with Bellway and Redrow (though doing much better than Crest - sad to say, as I'm holding rather a lot of 'em...) for year to date performance, so Telford is rubbing shoulders with top quality compadres....

Strictly

Cyber,

For what it's worth, although I'm not part of The TEF share chat, horse racing aficienado, crew here, I have Crest & Telford neck & neck at the moment...

Allowing on whether I've downgraded Crest a tad too far or not, they're either very slightly ahead, or very slightly behind, Telford at the moment.

But I'm nursing some substantial reverse trade losses on Crest if I made the switch right now, so not intending to trade any Crest to further up my Telford holding at present.

Strictly

Terrace,

Your comment is a considered one that looking at TEF's price against perceived real cash value.

However, if you open this up to considering TEF's share price, and consequent PBV, against other builders share prices and PBVs (because, as you know, I'm a perceived value tart rather than member of the TEF faithful), and if, as you suggest, the build to rent market does indeed start to open up to other major house builders, that may actually put Telford ahead of the game in terms of maybe operating in future in a lower ROE environment..?

And I appreciate that I've mooted the point here in the past - about a lower overall ROE for TEF, despite the theoretical skys-the-limit return on capital in using other people's money, I mean - it hasn't really seemed to gain any traction in the discussion, so I haven't scratched at it that much here...

Anyway, my point being that if part of future growth in the current climate for other household name builders is to come from build to rent, and that's obviously a big and somewhat speculative "if", and if that, in practice, brings a lower overall ROE to the industry (something the government and the public, no doubt, would like to see - but I also imagine the government doesn't want to mess too much with builders right now as it already seems to think we aren't building enough houses as a nation), then I would say the market has yet to price that lower ROE in for the house builders other than TEF.

Telford's pre-credit crunch track record for ROE is pretty awesome, and if the market should be priced on that track basis going forward, then IMO the current discrepancy between price and value currently is staggering.

But if it's pricing based on an assessment of the realistic prospective long term return for builders for build to rent - and especially if more big players enter this area and margins are consequently squeezed - then it would seem to me that some of the other builders have some way to go on the downside to catch up on price to book values.

I mean, as of close of play last night, I have Telford at a price to book of only 0.95 compared to Redrow at 1.21, Bovis (whom we don't mention...) at 1.22, and going on upwards from there to the heady heights of Persimmon, of big bonus fame, at 2.12.

The notable exception to this, dare I mention it, being Crest - at a lowly PBV of only 0.92.... painful right now, as I've held more than a few throughout this year...

Strictly

James et al,

In my forward planning, I'm allowing for the ROE on all builders to fade over the next few years - currently, they're all comfortably above the long term average (with the exception of Bovis - but we don't talk about them, and Telford, because they've changed their business - but I've allowed for that in my book value weighting for them) and, in all likelihood (and in this game we all live in the world of likelihoods rather than certainty.... don't we..?), the drip feeding of slightly disappointing news by individual companies will cause a few bad hair days for investors along the way...

Crest were early out of the box on this.... look what's happened to their share price - taken a pasting well above and beyond their near term future as envisaged by the scribblers.

And now Telford - a definite "toys out of the pram" by the market this morning first thing.

No real market excitement on the other builder share prices, though - Taylor Wimps and Barratt even finished a tad up on the day!

Does the market really think it's just going to be Crest and Telford being a bit cautious, or is it shooting the early messengers..?

The bottom line for me is that I don't speculatively either go to cash, or hold off investing new money, due to taking a view on short term price movements..

And I never have done in 18 years in this investing malarkey - frankly, I don't have the cojones for it...

IMO, with the exception of Telford in spring 2007, when the share price got a real hard-on for a very short while, the builders are pretty much always good value against cash.

What interests me MUCH MORE is their perceived value against each other - and that can be rather fluid and certainly, IMO, much easier to call in as much as getting it more right than wrong rather than expecting to get it right all the time and I'm happy to stand on how that's worked out for me on that one...

So, being somewhat more prosaic in my approach than some of the more informed posters here, it boiled down to - did it change my EPS projection and, in turn, did that cause a change of book value weighting percentage on Telford..?

The answer to both of those for me was no - though, of course, others may come to a different view - and I'm imagining that we'll see more "less-than-upbeat" comments from other builders as we go.... though we may not...?

And, again unlike the TEF Musketeers, I have no particular loyalty to any one share, and am happy to reverse the trades I made today if the market throws its rattle at Bellway next week or Redrow next month.

Strictly

Marco Polo....

Was he the Irishman who invented the mint..?

Four questions:

1) Is the trading update today likely to affect, by a single property, the number of units TEF sells this year?

2) If not, is it therefore likely to have any impact whatsoever on the bottom line?

3) Do you reckon the trading update provided a buying opportunity for you today?

4) If so, did you take advantage of it..?

Strictly