• Mark Watson-Mitchell

Inland Homes – I love ‘brownfield’ and now it is time to buy

A bit like my love for companies with annual recurring revenues (ARR) – ‘brownfield’ is on a comparison level.


And I feel that now is the time to buy this company’s shares. In fact, they are too cheap to ignore!


So, what is special about ‘brownfield’?


In the UK, a ‘brownfield’ site is defined as ‘previously developed land’ that has the potential for being redeveloped. It is often land that has been used for industrial and commercial purposes and is now derelict and possibly contaminated.


The UK is committed to developing ’brownfield’ sites as a priority.


That includes land or buildings that are not currently in use, either vacant, abandoned, and/or contaminated. The term usually refers to former industrial sites in urban areas that may need cleaning up before they can be redeveloped.


Many ‘brownfield’ sites are located in existing towns and cities. That means that much of the infrastructure needed for new homes, such as transport and utilities, is already in place, which can obviously reduce developer costs and timescales.


Identifying sites gives a buzz


In the 1980s, when I had a property development and construction company, I would enjoy nothing more than driving around the countryside with my group CEO identifying potential sites for redevelopment, especially for turning ‘wasteland’ into valuable housing.


But we were only small-time players in that space.


Once a site is pinpointed a whole process of ‘putting-in’ is commenced. It is far better to ‘put-in’ value than to take out.


Helping local communities is very important.


Going for the gain


The majority of professional land developers find that it can be possible to gain planning permission on ‘brownfield’ sites in the countryside, especially if those previous sites are now a nuisance or cause an eyesore.


Plots on the edge of urban settlements are often the first that councils consider for new housing, particularly if that settlement is set to expand.


Substantial ‘brownfield’ sites, such as former hospitals, army bases or other government land, are often targeted for large-scale housing developments.


It is increasingly important that more houses are built upon ‘brownfield’ sites, because it lessens the need to build on previously undeveloped greenfield sites.


Use up the ‘old’ before you start on the ‘new’


It is believed that more than half of the UK land area is farmland, such as fields and orchards, while just over a third is natural or semi-natural, such as moors, heathland, and natural grassland.


Some 5.9% is built on, such as roads, buildings, airports and quarries, with around 2.5% being classed as green urban, like parks, community gardens, golf courses and sports pitches.


Whilst having one of the highest population densities in Europe, it is interesting to note that the actual amount of land taken up by homes and gardens across the UK is a little over 5% – 12,700 km2 out of the total UK land of 244,000 km2.


It is considered that the UK population is expected to grow by 7% to some 72m people by 2040.


That will add to the pressure that our cities, towns and villages have to offer by way of infrastructure such as public places, amenities, services and of course new homes.


Planners and developers now need to take in mind how they will cope with new living, working and social behaviours.


As the population continues to grow over the next couple of decades, it is apparent that well over the Government’s aim of 300,000 new homes a year will be required.


That is why I really like this company


Set up in 2005, Inland Homes (LON:INL) is an AIM-listed specialist housebuilder and ‘brownfield’ developer.


I have known the two main men behind Inland Homes over the last two decades. I have a very strong respect for their professionalism and ability.


They successfully built up and sold off their previous AIM company, Country and Metropolitan Homes, to Gladedale in June 2005. Within days they were off and running with Inland.


They have built around them a strong and experienced management team. By using their knowledge the company adds value throughout the planning process and looks to secure permissions within a two-year period.


So already you realise that I am keen on its management and respect their ability.


The company acquires brownfield land in the South and South-East of England principally for residentially led development schemes. The business then enhances the land value by obtaining planning permission, before building open market and affordable homes or selling surplus consented land to other developers to generate cash.


The group’s land bank is principally ‘brownfield’ and includes sites both with and without planning permission, plus strategic sites which are usually held as an option and therefore require only a limited amount of capital.


A massive land bank


The last published gross development value of the group’s entire land bank was around £3.1bn. It comprised a record 11,045 plots, of which 2,470 have planning consent and 1,819 where planning applications have been submitted.


Such a site that the group currently has plans for is the former Master Brewers Hotel site in Hillingdon, London. Vacant for over eleven years Inland acquired it and drew up extensive plans for the development of more than 500 new homes.


Effectively it is planning to utilise the old site to deliver much needed affordable homes.


Obviously, like practically every development scheme anywhere in the country, there have been loud voices of dissent about the scheme, but Inland has, as always, done considerable work in advance. It remains confident that it will win full approval for the development.


This scheme is being steered by the group’s asset management division, which is currently involved in six similar projects on behalf of investors, totalling some 3,181 homes.


The company has a number of joint ventures with institutional landowners, such as the National Health Service, the Ministry of Defence and local authorities, who often are owners of surplus land that could be developed commercially.


Development details soon


I would expect to get some breakdown of the group’s current development projects within the next few months – with a Trading Update due very shortly and its finals thereafter.


Earlier this month the group gained planning permission for its Gardiners Park Village in Basildon, for up to 700 new homes, together with 25,000 m2 of commercial space, new school and community facilities. The estimated gross development value of the 54-acre site is in excess of £200m.


A couple of weeks ago it indicated that it was expecting to get planning permission for a residentially led, mixed-use scheme of 380 homes plus 930 m2 of flexible commercial space at Dagenham Dock, Dagenham.


EPRA NAV – 97.80p per share looking to rise again


The group’s EPRA Net Asset Value is adjusted to included properties and other investment interests at fair value and to exclude certain items not expected to crystallise in a long-term investment property business model.


An EPRA NAV makes adjustments to its IFRS NAV to provide shareholders with the most relevant information on the fair value of the assets and liabilities within the true real estate investment company and its long-term investment strategy.


The EPRA undiluted NAV per share at the end of March this year was 97.80p, it should have been higher than that figure at the end of last month.


Estimates over the next couple of years could see at least a 20% improvement.


Equity split


The group has some 230m shares in issue.


Private holders include Stephen Wicks, CEO, 17.76m shares (7.78%), Nishith Malde, CFO, 11.50m shares (4.81%), Mark Dixon 9m shares (3.9%), and Premchand Shah holds 5.90m shares (2.57%).


Professional investors include Hargreaves Lansdown Stockbrokers (9.46%), Chelverton Asset Management (4.87%), Henderson Global Investors (4.41%), Hargreaves Lansdown Asset Management (3.96%), Downing Ventures (3.32%), and Brooks Macdonald Asset Management (2.17%).


Broker’s View


Early next week we could well see the announcement by the group of its Trading Update for the year to end September.


I believe that it will show just how cheap the group’s shares are at the current price.


Analyst Adrian Kersey at Panmure Gordon rates the company’s shares as a ‘buy’ and has put out a price objective of 119p.


He is estimating that the group’s sales will be £155m (£124m) while its adjusted pre-tax profits will have more than trebled to £13.4m (£3.7m), with earnings coming out at 4.5p (1.3p) per share.


The next two years will see the revenues rise to £190m then £205m for 2022 and 2023 respectively, with profits increasing significantly to £19.9m then £23.2m, worth 6.9p then 8.1p in earnings per share.


My View


Those estimates show very impressive sales and profit growth.


They also show just how ridiculously inexpensive the £106m capitalised group’s shares are at the current 46.5p.


As value investors begin to realise this group’s investment attractions, I expect to see these shares rising fairly quickly to 60p and above, with the all-time peak of 89p, which was reached early last year, being penetrated again within the next couple of years.


(Profile 13.08.19 @ 68p set a Target Price of 110p)

(Profile 24.10.19 @ 77p set a Target Price of 110p)

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