More to come from Telford Homes

Housebuilding is back in fashion with investors as the outlook on the sector, after predictions of doom and gloom for property in general post-EU referendum, begins to look more rosy.

We heard recently that feted fund managers Neil Woodford and Mark Slater are piling into London-listed housebuilders. While Woodford is backing the bigger names, Slater is hoping to capture some big growth from the smaller players.

The reason for Slater's approach is that many of the "smaller names are still playing catch up" after the Brexit vote. One AIM-listed star in his portfolio is Telford Homes, which operates in "non-prime areas of London".

And Slater, like other shareholders, will be delighted this morning after Telford confirmed a promise made seven weeks ago – that the year ended 31 March 2017 saw record revenues of £292 million, a 19% increase year-on-year.

Pre-tax profit came in at £34.1 million, up 6%, and the company insists it is "on track to exceed" targets of £40 million of pre-tax profit in 2018 and £50 million in 2019. In fact, over 80% of anticipated gross profit for 2018 and 60% for 2019 has already been secured.

No wonder, then, that Telford shares ticked up Wednesday to a near two-year high. Year-to-date gains of 36% are impressive, and Peel Hunt's just raised dividend expectations by 5% for 2018, giving a prospective yield of 3.9%, rising to 4.4% in 2019.

That will help support shares and "provide further attractions," writes analyst Gavin Jago. The full-year 2017 dividend, at 15.7p, was up 11% on last year.

Jon Di-Stefano, chief executive, talked about have established Telford "at the forefront of the London build-to-rent sector" since the beginning of 2016, with over £230 million of combined contract value secured to date.

Since the last of those deals, Chobham Farm in Stratford at the end of March for £53.7 million, the only way for the share price has been up.

"Build-to-rent is a strategic focus for the group and we expect to further increase our activity in the coming months," Di-Stefano said Wednesday.

It's a company Interactive Investor knows well, having backed them at "bargain basement prices" after a trading update in October. Back then, Peel Hunt tipped the stock up to 485p. It's up by nearly half since and the broker's 505p price target implies around 20% upside.

That view's not changed and Jago still reckons the market is failing to factor in Telford's growth prospects. As Di-Stefano points out, the capital currently has a "chronic need for homes", which shows no sign of abating and reiterates management's confidence in its outlook.

Trading on 8.5 times price/net asset value versus return on equity for calendar year 2017, this multiple falls to 7.4 times for 2018, which is 15% behind the sector average, Jago explains. "We believe this discount is unjustified given the group's growth profile and de-risked forward sales position."

Shore Capital has increased its target, with both aforementioned brokers publishing a forecast for 2020 pre-tax profit of £54 million – almost 60% up on 2017. Shore's Robin Hardy has changed the way he values Telford due to its two discrete streams of profit – open market sales and build-to-rent – differentiating it from other housebuilders.

Fair value for Telford, Hardy says, is now 508p, leaving it as "one of the very few stocks in the housebuilding sector that still offers any potential capital growth to investors."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.