Telford Homes’ trading update is a timely reminder that house building can’t always fall into neat six months tranches. Is also serves to remind us that demand for affordable housing in the London market remains strong and, combined with build to rent, provides excellent visibility through its strong forward order book, supported by a robust balance sheet. We expect continued growth over the next three years.
Telford Homes entered the current financial year with a very strong forward sales position. The timing of development completions is going exactly to plan with a significantly skewed H2 sales and profits weighting. However, in line with market expectations, completions in H1 will be significantly lower than H2, and lower than the corresponding H1, due to the timing of developments. The company remains on track to meet our £43.5m PBT forecast for the full year. To demonstrate confidence in its ability to meet market forecasts the dividend in H1 will be equal to that of H2.
Telford Homes continues to increase its exposure to the attractive build to rent sector. When combined with the strong forward sales position at the start of the year, it has been well insulated from any declines in activity in the London market in general. For example, the sales market in London has been affected by both economic and political uncertainty, although this has largely affected higher value properties. Elsewhere, tax changes have reduced the number of active UK-based buy to let investors in the market.
The company starts H2 with a considerable forward order book (of £580m). This equates to over 70% of cumulative two years’ forecast sales. In our opinion a good level of forward visibility should equate to a higher than average rating. The company says it expects to exceed £40m PBT in 2018 and £50m PBT in 2019.
The stock trades at a 9% discount to the Housebuilding sector (on a PER of just 8.7x) despite the attractive growth prospects and de-risked forward sales model. On a Price/Net Asset Value (PNAV) it trades at 1.30x in 2018, falling to 1.16x in 2019, a 25% discount to the sector. Our 17.0p forecast dividend in 2018E equates to an attractive 4.3% dividend yield, rising to 4.8% in 2019E