High-yielding Telford Homes makes case as medium-term buy

Housebuilders have spent six months giving back hard-won post-EU referendum gains, but Telford could be worth a lot more than this, reports Graeme Evans.

In a housebuilding sector skewed by Brexit jitters, today's interim results from Telford Homes should merit closer attention from investors given that its shares have been the weakest of the pack since the EU referendum.

While the sector trades on a 2019 price/net asset value multiple of about 1.50 times, the figure for Telford is closer to 0.85 times. Shares are down more than 25% in 2018, with the company one of the worst affected by the dumping of housebuilding stocks in October and November as the Brexit outlook darkened.

What makes this stock interesting from an investor viewpoint is more than just a dividend yield above 5%. Where the company differs from the rest is the progress it has made in the Build to Rent sector, which significantly de-risks the Telford development pipeline through deals with large institutions.

Even though the near-term outlook is unlikely to improve any time soon, brokers Canaccord Genuity and Peel Hunt are more optimistic about Telford's medium-term prospects based on this move towards Build to Rent. The pair have 'buy' recommendations and target prices of 500p and 430p respectively, implying potential upside of as much as 62%.

Shares rose 4% on the back of today's results, although Telford's target for £50 million in profits in the financial year is looking increasingly fragile. It still needs just under 60 individual sales in order to achieve its target, but 20 are priced above £600,000 and it is this bracket where homes are proving tougher to shift.

Telford said it was becoming harder to predict sales rates due to Brexit and political uncertainty, a trend echoed in the share price performances across all major housebuilders in recent weeks. Having received a boost in the Budget due to the Chancellor's decision to extend the Help to Buy scheme for first-time buyers to 2023, the sector has endured a miserable November.

One crumb of comfort for investors ahead of the spring selling season is that housebuilding shares have a long record of exceeding expectations in the first quarter of a year.

In terms of current trading, Telford said it has now secured profits of £40 million from activities including individual sales, Build to Rent and existing construction contracts. However, Canaccord and Peel Hunt both think it is likely that Telford will fall short of its target by £3 million to £4 million.

Canaccord analyst Aynsley Lammin added:

"Shares look undemanding in terms of valuation but near-term momentum is lacking."

Source: TradingView (*) Past performance is not a guide to future performance

Telford, which focuses on non-prime locations in the London market, said its recent strategic shift towards purpose built homes sold to institutional investors had been "well timed". It believes that this sector will form a significant part of the London market going forward, similar to in US cities.

While margins on build to rent are more modest than for individual open market sales, there is the attraction of a higher return on capital.

Telford said: "The proportion of people renting continues to increase in London due to the greater flexibility it offers and the lack of the significant financial commitment that comes with a mortgage.

"As a result, the market is starting to mirror that in many US cities where build to rent has been introduced over the last 25 years and made renting a way of life."

In individual open market sales, the company's average price in its development pipeline of £537,000 is below the "psychologically significant £600,000".

Telford said: "Homes priced above £600,000 are currently more difficult to sell, especially if customers already own a home and are delaying a new purchase due largely to negative market commentary and sentiment.

"Fortunately, this price point represents a relatively small proportion of our overall portfolio and we continue to make progress selling homes above this level albeit at a much slower rate of sale than we would normally expect."

In today's results, revenues were 31% higher at £129.6 million and profits 16.1% higher at £10.1 million, The dividend, which is based on a policy of paying one third of earnings across each financial year, was increased 6.3% to 8.5p.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.