Investors Chrinicle27 Jun 2017 14:17
Mispriced value play
I feel that investors are being too cautious in their valuation of Inland Homes (INL:57p), a specialist housebuilder and brownfield land developer. After I included the shares in my 2013 Bargain Shares portfolio at 23p ('How the 2013 Bargain Shares fared, 7 February 2014), the price rose almost fourfold to an all-time high of 89p at the start of last year. However, since then it has given back almost half those gains and is below the 61p level at which I last recommended buying, pencilling in a target price of 80p at the time ('Taking profits and running gains', 4 April 2017).
The recent lacklustre share price performance can be attributed to investor caution over the company hitting analyst profit estimates for the 12 months to end-June 2017. Analysts John Cahill and Miranda Cockburn at broking house Stifel predict a pre-tax profit of around £17m, up from £14.9m the previous year. Inland reported recurring pre-tax profits of £4.4m in the first half to end-December 2016, well below the annual run rate embedded in those estimates, largely due to the timing of land sales which can be lumpy due to their very nature. However, at the time of the half-year results at the end of March, the directors appeared confident that they could make up the shortfall and even sanctioned a 25 per cent increase in the half-year dividend to 0.5p a share, supporting analyst predictions of a full-year payout of 1.6p a share, up from 1.3p a share in the 2016 financial year.
Bearing this in mind, and coming just days before its financial year-ends, Inland reported recently that it had sold off two parcel of land with planning consent for 85 affordable homes for a total of £9.5m and has entered in construction contracts with the purchasers to build the units over the next 15 to 18 months. The company has also exchanged contracts to sell a refurbished listed building at one of those developments, Queensgate, Farnborough, for £1.95m. These disposals have generated free cash flow of £8m after paying down borrowings, and add £1m to EPRA net asset value (NAV).
Embedded in Stifel's aforementioned full-year profit forecasts are expectations that Inland will sell 240 private homes at an average price of £300,000 and at a gross profit margin of 20 per cent; and sell a total of 500 plots at an average price of around £105,000 from its land bank of 7,151 plots, of which more than a third have planning permission. In the first half, private residential home sales were steady at 101 units, but, more importantly, the housebuilding division's forward order book stood at £31.8m, up 52 per cent year on year, highlighting potential for a strong second half. So, although we will have to wait until the company issues its pre-close trading update on or around 23 July to see whether Stifel's forecasts have been met, if Inland was going to miss them the directors had the opportunity to say so recently.
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