We feel Telford Homes (TEF:AIM) is not getting sufficient credit for its position in an attractive growth niche and a differentiated business model. We expect that situation to change in the coming 12 months.

Despite its name, which conjures up images of the England’s most rural county Shropshire, the company is focused almost entirely on London.

Its specific focus is ‘non-prime London’ which is homes at the more affordable end of the market.

The perceived risk posed by Brexit to the London property market has helped keep a lid on the share price. Yet the continuing concentration of jobs in the capital makes it easier to predict demand for Telford’s properties whose average selling price of less than £600,000 is relatively cheaper than some of its quoted peers. For example, Berkeley’s (BKG) average selling price is currently £719,000.

Supportive backdrop

Telford is likely to enjoy a supportive backdrop with the mayor Sadiq Khan’s London plan published at the end of November lifting targeted new housing supply from 42,000 to 66,000 new homes a year.

Khan’s plan will make it harder for boroughs to refuse planning permission and easier to grant it. The continuing Help to Buy scheme and cuts to stamp duty at a national level are also helpful to Telford.

The company has great earnings visibility. For the 12 months to 31 March 2018 it has already secured orders worth 95% of guided gross profit as well as 65% of what’s forecast for the following financial year.

The total development pipeline is worth £1.4bn, equivalent to nearly 4,200 units and 3,000 of these have planning consent.

This underpins guidance for pre-tax profit to grow to more than £40m for the current financial year and £50m for the following year.

What differentiates Telford from the rest?

A quality which makes Telford distinct from a lot of other housebuilders is its growing exposure to build-to-rent.

As the name suggests, build-to-rent or private rented sector developments see all the properties built for rent rather than sale.

By moving into this space, the company should be able to expand more rapidly without putting undue pressure on its capital position as the deals are typically forward funded by institutional investors.

Despite these attractions stockbroker Peel Hunt reckons the stock trades at a rough 20% discount to the rest of the sector based on the ratio between its price to net asset value and forecast return on equity. It also offers a dividend yield of more than 4%. (TS)

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