Safe as houses
​Telford Homes specialises in planning, designing and building developments on brownfield sites in London. The company is a hands on developer with in-house construction expertise. It builds apartments and houses in the main, but the nature of mixed-use inner city development means it also builds commercial property, schools, churches etc.
We think the company is in as strong a position as it has ever been in the 15 years since flotation. The company has a strong balance sheet, with an expanded equity base and significant headroom on its banking facilities, a large development pipeline and impressive forward sales position, and good levels of demand for its product and geography from a diverse group of buyers.
London has an international reputation as a growing, vibrant and important economy, with an excellent transport network and a stable and attractive property market. Its population is large and is expanding but there is a chronic shortage of new homes being built in an already undersupplied city.
The company has a £650m forward order book and this equates to over 60% of cumulative three years sales. This is the highest level of forward sales in the sector (relative) and in our opinion, we are at a stage in the cycle where a good level of forward visibility should equate to a higher than average PE/PNAV valuation.
Telford Homes is on a current year (12 months to March’17) P/E of 8.3x, falling rapidly to 6.3x in the year to March ’18, and again to just 5.2x the following year. From a Price/NAV perspective it trades on 1.15x (calendarised 2016), falling to 1.06x in 2017, a 28% discount to the sector average. Our forecast assumes 2.3x dividend cover this year rising to 2.9x in 2018E. Therefore our EPS forecast of 35.9p gives rise to a DPS of 15.7p. With the shares trading at 295p this equates to an attractive 5.3% dividend yield rising further to 5.5% in 2018.
We base our target price at 1.0x 2019E PNAV discounted back to present value, add the present value of future dividends, and apply a 10% premium to reflect the Group’s distinct operational and balance sheet strengths. That generates a target price of 383p / share.
Telford Homes is a developer of residential-led, mixed use sites in London. Co.'s customers include individual investors from the U.K. and overseas, owner-occupiers and housing associations. Co. is working with institutional investors in the build to rent sector. Co. has only one reportable segment being housebuilding in the U.K.
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