Trafalgar New Homes plc (TRAF.L)

Transcription

1 This research is intended for UK institutional investors only. It is not intended for retail customers and any retail customers should seek professional, independent advice before investing. Summary Data Price (p) 4.2 Market Cap ( m) 9.6 Shares in issue (m) Sector Household Goods & Home Construction Source: Fidessa, Allenby Capital 9.0 TRAF TRAFALGAR NEW ORD 1P Q Q Q Q Sourc e: Fides s a Key data (Y/E 31 March) ( m) *2012A 2013A 2014E 2015E Revenue EBITDA Adj. PBT FD adj. EPS (p) DPS (p) Net (debt) /cash (7.878) (7.980) (2.712) (1.224) EV ( m) PER (x) Yield NAV ( m) (1.378) (0.847) EV/EBITDA (x) Source: Trafalgar New Homes plc, Allenby Capital *16 month period Key shareholders C. C. Johnson 81.8% 10 Dec 2013 CORPORATE Trafalgar New Homes plc (TRAF.L) On target to achieve 2013/14 forecasts Trafalgar New Homes is an AIM quoted residential property developer specialising in small developments in the south east of England, primarily in the relatively buoyant and affluent markets of Kent and Sussex. Results for the half year ended 30 September were in line with expectations and reflected the proceeds from the sale of the last remaining properties at its Edenbridge development. However, the majority of revenue and profits for the current year are expected to be generated from the sale of properties at the group s flagship site in Hildenborough, Kent. The group has commenced the marketing process and four units have already been sold subject to contract, thus we believe the group is on track to meet our full year expectations which assumes the sale of all 12 units. Since float in July 2013 the shares have risen by 110% but still sells on an undemanding PER of 8.6x current year forecast earnings - we remain comfortable with a fair value of 4.5p. Specialist housebuilder in the South East Trafalgar New Homes plc (Trafalgar) is an AIM quoted housebuilder and property developer operating exclusively in the South East of England. Its main trading subsidiary, Combe Bank Homes Ltd. (CBH), was founded by Christopher Johnson (the principal shareholder of Trafalgar) and his son Alexander Johnson. CBH builds for the middle and upper housing markets on relatively small individual sites, which are typically outside the resources of local housebuilders but are generally considered to be too small for the larger house building groups. An outsourced model CBH acquires land for development and then outsources the build process to third-party contractors, almost exclusively on a fixed price basis, thereby protecting the business from potential design and construction risks arising from cost overruns and escalations. The funding of development land and property is arranged on a site-by-site basis through the group s bankers who usually provide not less than 60% of the land and building costs, with the remainder financed through the group s own resources. Source: Trafalgar New Homes plc Contact details Ian Jermin (Research) i.jermin@allenbycapital.com +44 (0) Emma Ayton (Sales) e.ayton@allenbycapital.com +44 (0) Graham Bell (Sales) g.bell@allenbycapital.com +44 (0) Amrit Nahal (Sales) a.nahal@allenbycapital.com +44 (0) Shares priced at close of business 9December 2013 Interim results in line with expectations In the six months to September 2013, Trafalgar generated revenues of 864,000 (compared to 660,000 in the comparative period), reflecting the sale of the last five units at the Edenbridge development. This revenue generated a pre tax profit of 101,000 (versus a loss of 102,000), as anticipated. Marketing of the properties at the group s flagship development in Hildenborough, Kent has commenced and our expectations of earnings for the full year are based on the successful sale of all 12 of these units representing an expected retail value of just over 7m. Four of the units have already been sold, subject to contract, and we are confident that the sale of the remainder will be concluded before the group s March year end. Therefore, our forecasts for 2013/14 and 2014/15 remain unchanged. Trafalgar sells on a current year PER of 8.6x forecast earnings compared to the average for its peer group of over 15x. We are therefore comfortable in retaining a fair value of 4.5p. Allenby Capital acts as Nomad & Broker to Trafalgar New Homes plc. This document is a marketing communication and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

2 Results analysis Interim results in line with expectations Revenue in the first six months ended 30 September 2013 was 864,000 reflecting the proceeds from the sale of the remaining five units at Meade Court, Edenbridge in Kent, the development originally comprising of ten newly constructed apartments and one refurbished two-bedroomed cottage. This compares to revenues in the comparative period of 660,000. Revenues 864k ( 660k) Administration costs were broadly unchanged at 123k ( 120k). However, following the AIM listing in July 2013 the cost base of the group increased to reflect remuneration for the Chairman Chris Johnson, who previously did not draw a regular salary. The effects of this increase will be seen more fully in the second half and we expect a full year administration charge of around 450k. After administration charges the group recorded a profit before tax of 101,000 for the half year, compared to a loss of 102,000 and was in line with our expectations. Profit 101k (loss 102k) Second half will reflect sale of Oakhurst Park Garden development Prospective revenue for Trafalgar s financial year to 31 March 2014 year is already well defined and aside from the completed sale of the five units at Edenbridge, will reflect the sale of all units at the group s major development, Oakhurst Park Gardens in Hildenborough, Kent. This is a prestigious gated development set in a semi-rural location adjacent to the affluent town of Sevenoaks, consisting of twelve, three and four bedroom town houses within grounds extending to approximately four and a half acres of land. Second half to benefit from sale of Oakhurst Park units Oakhurst Park Gardens looking east Source: Combe Bank Homes Ltd. Oakhurst Park Gardens looking west Source: Combe Bank Homes Ltd. Page 2 of 9

3 The marketing of these properties has commenced through Savills estate agents and we expect the sales process to complete over the remaining six months of the group s financial year. These twelve town houses are to be sold at prices between 550,000 and 650,000 per unit and we have estimated a total sales value of over 7m. The strength of the housing market in general and in the south east in particular provides us with significant comfort that interest in the properties will be substantial. Four of the houses are already under offer and interest is high with prospective purchasers seeking to take advantage of the Help to Buy government funding scheme for which Trafalgar is registered. Estimated sales value of c.7m Exhibit 1: Current status of Oakhurst Park Gardens development Oakhurst Park Gardens development Plot Beds Price Status Sold STC , , ,000 Sold STC 615, /4 615, /4 600, /4 600, /5 635, ,000 Sold STC 525, ,000 Sold STC 550, ,000 Sold STC 575, , ,000 7,085,000 2,265,000 Source: Combe Bank Homes Ltd website The prospective sale of these units underpins our forecasts for the financial year ending 31 March 2014 which assumes revenues of c. 8m (against 2.2m for the previous year) and adjusted profit before tax of 1.22m, double the 0.618m reported in the previous year, in spite of the higher cost base referred to earlier and beyond It seems as though the south east of England still represents an exceptionally buoyant market for residential properties. In recent research on the housing market, estate agents Savills estimates that the region will show the fastest rate of house price growth in the country over the next five years at 31.9%, with the region set to outpace London (estimated growth of 24.4%) for the first time in a decade. Without the need for the resources to research large scale opportunities, Trafalgar s management team is able to move quickly to secure moderately sized sites for potential development, with or without existing planning permission. While land prices in the major towns of the region have risen commensurately reflecting this higher level of demand, prices in the outlying areas are still reasonable. Page 3 of 9

4 Land bank As a relatively small housebuilder, CBH does not have a significant land bank. However, the experience of its directors and their knowledge and contacts within the South East residential housing market allows them to identify opportunities to purchase land, with or without planning permission, on sites probably not large enough to interest national housebuilding groups, but equally of a sufficient size to make the financing of such very difficult for the smaller jobbing housebuilder. Currently, Trafalgar s land bank consists of a site in Ticehurst, East Sussex for the development of two cottage style semi-detached houses, a site in Tunbridge Wells, Kent for the development of six apartments, a site in Chatham, Kent for the development of three houses and a site in Sheerness, Kent which will consist of six three-storey two bedroom town houses. The board anticipates construction of these properties to commence in early 2014 with a view for sales to positively impact results for the financial ending March Land bank consists of four sites for the development of 17 units Land under option Trafalgar s site in Staplehurst, Kent is considered by the directors to be a major opportunity for the group and is a project where it has an option over some 5 acres of land. Staplehurst has been earmarked by Maidstone Borough Council for substantial residential development and management was therefore optimistic that planning permission would be granted on the 5 acre site. However, on 3 December the Council unexpectedly refused the application, even though the company had initially been given clear indications that the initial phase of the development would be considered positively by the planning committee. Being refused initial planning consent is not an unusual occurrence for property developers and the company will therefore appeal the refusal in accordance with the advice given to it by its planning consultants. Our forecasts will continue to assume that planning permission is granted. Staplehurst site seeking planning consent on appeal Exhibit 2: Estimated chronology of build-out and revenue contribution Year to 31 March High Street, Edenbridge, Kent: Sale of remaining 5 units 1,060,000 Oakhurst Park Gardens, Hildenborough: Sale of all 12 units 7,000,000 Total sale proceeds 8,060,000 Year to 31 March 2015 The Bell Inn, The Square, Ticehurst, East Sussex: Sale of a pair of semi-detached houses 930,000 Burnside, Sandhurst Road, Tunbridge Wells, Kent: Sale of 6 apartments 1,500,000 Wellesley Road, Sheerness, Kent: Sale of 6 two bedroom houses 880,000 George Street, Staplehurst, Kent: Sale of 75% of the units on Phase 1 4,400,000 Chalk Pit Lane, Chatham, Kent Sale of 3 houses 460,000 Total sale proceeds 8,170,000 Source: Allenby Capital estimates Page 4 of 9

5 It is CBH s intention to develop the site in two distinct phases. Phase 1 is expected to comprise 22 units (part private/part housing association) covering approximately half the site. Access will be retained to the rear half of the site, which under Phase 2 should accommodate a further 22+ units, subject to further planning permission. Assuming planning permission is granted, construction on Phase 1 is expected to commence and be partially completed prior to the 31 st March 2015 financial year end and that a significant element of the development will therefore contribute to profit for that financial period. Phase 2 will be developed out thereafter, contributing to future years profitability. Valuation Since flotation in July, Trafalgar shares have risen by 110% but on our adjusted EPS forecasts still sells on a current year PER of just 8.6x, a multiple that is broadly maintained for 2014/15, in spite of an expected increase in the effective tax rate from an estimated 10% in 2013/14 to 15% in 2014/15. This still leaves the shares on a 40% discount to the sector and in consequence we remain comfortable maintaining our fair value of 4.5p per share which would equate to a PER of 9x. PER multiple at 40% of peer group 4.5p fair value retained Page 5 of 9

6 Financial Forecasts Exhibit 3: P&L Trafalgar New Homes m m m m Y/E March FY 2012A FY 2013 FY 2014E FY 2015E Profit & Loss (16 mths) Comments Turnover Oakhurst Park Gardens to be sold in FY 2014 Growth n/a n/a 265.4% 1.4% Cost of sales (1.700) (1.583) (6.175) (6.214) Gross Profit Margin 27.5% 28.2% 23.4% 23.9% Other income Profit on sale of CHI Total Administrative expenses (before seperately disclosed items) (0.251) (0.261) (0.456) (0.456) Seperately disclosed items (0.291) Cost of listing EBITDA (before seperately disclosed items) Margin 16.8% 25.4% 17.7% 18.4% Net Finance Expense (0.209) (0.163) Profit before tax Profit before tax (before SDIs and amortisation) Tax (0.000) (0.087) (0.122) (0.201) Tax losses to be utilised Tax rate 0.0% 14.1% 10.0% 15.0% Net Profit/Loss EPS Fully Diluted (p) Fully Diluted (adjusted) (p) Shares Basic, weighted average (m) Diluted, weighted average (m) Shares in issue at year end (m) Dividend per share (p) Source: Company data, Allenby Capital Page 6 of 9

7 Exhibit 4: Cash Flow Trafalgar New Homes m m m m Y/E March FY 2012A FY 2013 FY 2014E FY 2015E Cash Flow Comments Operating cash flow Operating profit Depreciation Operating cash flow pre changes in working cap & provisions Decrease/(Increase) in inventory (Decrease)/Increase in trade and other receivables (0.056) (1.013) (2.700) Increase (decrease) in trade and other payables Net movement in working capital (0.518) Cost of listing Interest paid (0.033) - (0.209) (0.163) Other income Net cash inflow/(outflow) from operating activities Investing Activities: Purchase of tangible fixed assets (0.002) Net cash inflow/(outflow) from investing activities (0.002) Financing Activities: Proceeds from issue of shares Funds raised in July 2013 Share issue costs (0.021) - (0.220) - Net movement in loans (0.567) (0.058) (3.500) (0.122) Dividends paid (0.185) Amounts introduced/(withdrawn) by directors (0.012) Net cash inflow/(outflow) from financing activities (0.600) (0.058) (3.440) (0.307) Net increase/(decrease) in cash and cash equivalents in the year (0.159) Cash and cash equivalents at start of period Cash and cash equivalents at end of period Source: Company data, Allenby Capital Page 7 of 9

8 Exhibit 5: Balance sheet Trafalgar New Homes m m m m Y/E March FY 2012A FY 2013 FY 2014E FY 2015E Balance Sheet Comments Assets Non-current assets Tangible fixed assets Non-current assets Current assets Inventories Trade, Property and other receivables Cash and Cash equivalents Current assets Total Assets Liabilities Current liabilities Trade and other payables (0.169) (0.453) (0.453) (0.453) Corporation tax - - (0.122) (0.201) Borrowings (1.011) (3.380) (2.900) (2.800) Current liabilities (1.180) (3.833) (3.475) (3.453) Non-current liabilities Borrowings (7.421) (4.993) (2.000) (2.000) Directors' loans Non-current liabilities (7.421) (4.993) (2.000) (2.000) Total liabilities (8.601) (8.826) (5.475) (5.453) Net Assets (1.378) (0.847) Total equity & liabilities Balance Sheet Ratios FY 2012A FY 2013 FY 2014E FY 2015E Long-term financial debts (7.421) (4.993) (2.000) (2.000) Short term financial debts (1.011) (3.380) (2.900) (2.800) Gross (debt) (8.431) (8.373) (4.900) (4.800) Cash and cash equivalents Net (debt) / cash (7.878) (7.980) (2.712) (1.224) Net debt/ebitda (x) Acid test (Current Assets less inventory / Current Liabilities) Source: Company data, Allenby Capital Page 8 of 9

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Research Recommendation Disclosures Ian Jermin is the author of this Investment Research and recommendation. Ian is employed by Allenby Capital Limited as an Investment Research Analyst. Tel: i.jermin@allenbycapital.com There is no planned update to this research recommendation. Unless otherwise stated the share price used in this publication is taken at the close of business for the day prior to the date of publication. Information on research methodologies, definitions of research recommendations, and disclosure in relation to interests or conflicts of interests can be found at Page 9 of 9