Telford Homes represents a pure play on London’s clear requirement for the delivery of more good-quality, new build homes. Management is continuing to orient development activities towards the more robust build to rent (BTR) subsector, although there will be a near-term dip in earnings as the pipeline transitions, factoring in isolated other project delays and current market conditions also. Regaining and sustaining historic profit levels would warrant a share price significantly ahead of the present valuation.
Telford Homes is a leading residential-led property developer in London and has successfully demonstrated an ability to leverage its local expertise across a range of client types. Citing a chronic housing shortage, the Mayor’s office has a clear agenda to raise new home building rates to c 65,000 per year over the next 10 years compared to a recent average of less than a third of that level. Medium- and long-term population and household growth expectations further underpin this demand.
The company has taken decisive steps in the rapidly expanding new build BTR subsector including the recent announcement of two long-term strategic partnerships being M&G and Invesco. Stretched London affordability ratios together with private rental flexibility led to this sector’s rapid growth; strong interest from financial investors and support from the London Mayor indicate that this is set to continue. Consequently, Telford Homes is well positioned in this environment and in the longer-term contexts of expected tenant and investor demand.
Telford Homes’ share price has declined by almost one quarter in the last 12 months (compared to a slightly improved FTSE All-Share Index over the same period), the decline occurring in Q418. Earnings expectations have eased back for FY19 and we show a step down in FY20 with a partial recovery in FY21, by which time the P/E becomes 9.1x on our estimates. We currently anticipate a flat 5.8% dividend yield across our estimate horizon. Our DCF analysis suggests the share price is factoring in EBIT slightly above the FY21 level in the medium and long term, while a recovery to FY18 levels equates to a share price over 50% higher.