Record results with PBT over 30% up on last year
Founded in 2000, Telford Homes specialises in planning, designing and building developments on brownfield sites in inner London where demand for new homes far exceeds supply. Here it constructs high quality apartments and flats, sprinkled with a few houses and the odd commercial property (eg school), reflecting the mixed-use nature of its sites. Today the firm released another positive trading update, saying that results for the y/e March 2018, would not only be at “record†levels, but also adjusted PBT would come in >30% above LY (£34.1m) and “slightly ahead of expectationsâ€. Accordingly we have nudged up our FY18 PBT forecast from £44.0m to £44.6m on LFL revenues 8% higher to £315m (vs £292m LY). The profit improvement has been driven by 3% higher margins thanks to sales mix and build cost savings, alongside volume growth. The latter mirroring the ongoing shortage of reasonably priced accommodation (typically <£600k each), coupled with “robust†demand from overseas/UK Buy To Let (BTL) investors, owner-occupiers & housing associations. In our opinion this secular imbalance is unlikely to subside anytime soon. Indeed in January >100 reservations were secured in only 3 weeks at the firm’s New Garden Quarter development in Stratford. All of this indicates to us (and independently correlated by Berkeley Homes) that the more affordable end of the Capital’s residential property market is still in decent shape, regardless of the constant media scaremongering. To their credit, the Board anticipated this shift a while back, buying land early and so being able to launch Bow Garden Square (E3, 109 units) in late March - primarily focused on owner-occupiers with prices starting at £390k. What’s more, from a macro perspective London’s demographics are supportive of the long term investment case. Between Mar’97-Mar’16, the population rose by 1.7m (+24%) to 8.7m (see below), and is predicted to climb to 10.1m by 2035. And having spoken recently to other builders, we are becoming even more optimistic on Build-To-Rent. In 2017 this fledgling asset class attracted £2.4bn (+21%) of fresh capital, but is set to mushroom another 18-19% pa on average over the next 6 years Factoring all of this in our forecasts for FY19 and beyond remain broadly unchanged. We believe Telford Homes should at least be valued in line with other UK developers, who presently sit on ‘price:net tangible asset’ and PE multiples of 1.7x and 9.7x respectively. Today’s RNS should help quell fears over the health at the more affordable end of the London property market and in turn hopefully trigger a re-rating in TEF’s stock, to bring it closer towards our 500p/share valuation.
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