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Trafalgar New Homes Plc

Q2. Could you please explain the Trafalgar New Homes business model and outline its mission?

TRAF specialises in small residential property developments in the relatively buoyant and affluent markets of Kent, Surrey, Sussex and the M25 ring south of London. We believe that this strategy positions the Group in a niche market place, between local builders and developers and larger house building companies in the high demand area of the South East. We focus on the select acquisition of land for residential development and, in order to keep tight control over our development and overhead costs, we outsource all development activities, for example the obtaining of planning permission, design and construction, and use fixed price build contracts. The funding of development land and property is arranged on a site-by-site basis through the Group’s bankers who usually provide no less than 60% of the land and the building costs, with the remainder financed through the Group’s own resources. In our target area we typically target development sites of up to 20 homes, with 2-5 bedrooms and sales prices typically ranging from £100,000 to £750,000 per unit, although larger projects are undertaken. Our mission is to build quality homes across all sectors of the market and the Group’s move to AIM reflects our intention to become a meaningful operator in the South East property development market.

Q3. Why the focus on South East England and can you please give a flavour of the type of properties you develop and their sale prices?

The Group’s focus on South East England has not happened by chance. The Directors have all lived in the area for many years and have acquired significant relevant experience of the South East residential development market. Not only is the South East the market which we know and understand but it is among the fastest growing regions in the UK due to its unrivalled transport links. The region also enjoys a lower level of property demand/price volatility with demand for housing likely to continue to outstrip supply in the longer term, offering a wealth of potential for TRAF.

Our particular target areas of Sevenoaks, Tunbridge Wells and Bromley continue to see property prices exceeding the Kent and the National average, as these towns remain popular with wealthy commuters.   It is believed that restricted development will continue to keep prices strong, particularly in the market for family homes, which remain under-supplied.

Using our inherent knowledge of the area we are able to develop sites that meet the particular demand of each location. For example, at Oakhurst Park Gardens in Hildenborough near Sevenoaks we have developed twelve, 3/4/5 bedroom houses to meet the demand of ‘lifestyle downsizers’ and young families. Whereas Edenbridge near Tonbridge was identified as having a lack of starter homes and had a strong letting market attractive to private investors. As a result we developed and have successfully sold several 2-bedroom apartments as well as a penthouse and studio apartment.

Q4. The UK housing market was hit particularly hard by the financial crisis, what have been your observations specifically with regards to the South East of England and are you seeing signs of recovery?

The South East housing market did not escape the effects of the financial crisis but I think recovery has come sooner and at a faster pace in London and the South East compared to the rest of the UK. As I mentioned before, in our principal stomping ground of Sevenoaks, Tunbridge Wells and Bromley, property prices are exceeding the average for Kent and the UK average. Savills have predicted house prices in the South East to have risen 24% by 2017. It is logical that as the economy and the property market improves, the price gap between London and surrounding markets may prompt London buyers to seek better value in the Home Counties.  This is likely to put upward pressure on house prices.

Certainly we see signs of recovery and, indeed, that has been reflected in the sale of all the properties we developed at Edenbridge and the interest being shown in our development and sales being achieved at the Oakhurst Park Gardens development which is still to be finished.

Q5. Are Government schemes such as the ‘help-to-buy’ making a difference to Trafalgar New Homes either directly or indirectly through getting the chain moving?

Yes, Help to Buy is making a difference.  A number of the parties interested in our latest development, Oakhurst Park Gardens, have intimated that they would wish to proceed to buy, utilising the benefits of the Help to Buy scheme.   The scheme is particularly attractive to potential purchasers of these properties because the scheme is in respect of properties costing up to £600,000 and the majority of the properties being offered for sale on the site are prices at between £525,000 and £600,000.

Q6. Can you please explain what Trafalgar New Homes has in terms of completed properties to sell on the open market?

Following on from the completion of the sales of the properties in Edenbridge, Kent, we currently have a twelve-unit site at Oakhurst Park Gardens for sale. This development has a gross development value of circa £7m, i.e. an average selling price of just under £600,000 per house, so it is a substantial scheme for the Group.   

Construction at the development is complete and we are now in the final stages of connecting all services. Marketing of the properties has started and with the finishing touches completed we are confident these properties will be sold in the early part of 2014.

Q7. Can you please explain the current building and development projects in progress that Trafalgar New Homes have?

We have four sites, with planning permission, on which we intend to start development in the New Year. Two of these sites (Sheerness, a six-house site and Chatham, a three-house site) have been held in our property portfolio through the recession (having been acquired in 2007) and the improvement in the market dictates that now is the time to start construction.  We also have a site for six luxury apartments in Tunbridge Wells and a pair of substantial semi-detached properties in Ticehurst, East Sussex, both ready to start development.

Q8. Can you please explain the future potential for Trafalgar New Homes in terms of land bank and planned developments?

The Group is continually seeking development opportunities, however we are watchful not to be financially overstretched at any one time. Our business model dictates that we borrow on a site-specific basis only and we do not propose to vary from that business model. This means that we have to provide the balance of the financial resources needed from our own sources, over and above the bank development finance we can obtain.   

With the sites we own, or those we have under Option, we are confident we will achieve our projected profitability for financial years 2014 and 2015.   We regularly bid for sites with a view to acquiring a development site which could contribute to 2015 year end but, more likely, will be in respect of the year end 2016 and onwards.   The acquisition of land for development, with or without planning permission, by way of outright purchase or through the Option/Conditional Contract arrangement (subject to planning) remains ongoing.

In addition to organic growth, we would always consider growth through acquisition and there is merit to considering an expansion of the Company through the acquisition of likeminded organisations, with the same philosophy but in a different region of  South East England.

Q9. Trafalgar have entered into an option with respect of land in Staplehurst, Kent, can you please explain what this means, what the planning application will include and when the Council decision is expected?

We have, indeed, entered into an Option Agreement in respect of land in Staplehurst, and our planning application is currently with the appropriate local planning authority.  By virtue of this Option and for a consideration of £1, we secured the right to purchase a five acre site in Staplehurst at a beneficial purchase price to us, which we will purchase during the Option period which still has some time to run.  The Option gives us the right to buy the land when planning permission is granted.  We believe we will obtain planning consent.

We have submitted a scheme of development embracing twenty-two housing units of two/three/four bedrooms (ten of which are affordable), on half of the site.  This is a very exciting opportunity for us and, in view of the purchase price payable by us and the projections of the value of developments in the area in the future, will be very profitable for us.  We anticipate a Council decision early in the New Year.

Q10. How do you see the financial demands relating to capital expenditure and working capital being met during this current financial year to March 2014?

As I have pointed out earlier, we borrow on a site specific basis only and fund the balance of the money needed to acquire and develop out a site and to pay our overheads from our own resources.  Those resources are generated from Director’s Loans, principally from myself, plus investor loans and retained profit.   We are confident the financial demand relating to our development work through 2014 and into 2015 is comfortably covered from the monies available to us currently and the money that will be released from the sale of the houses on the Oakhurst Park Gardens site.

Q11. Profit before tax for the year ending 31 March 2013 amounted to £617,976, a 196% increase from the previous year, what do you put this down to and what is the outlook for the financials this year?

Whilst it appeared that the profit before tax for the year ending showed a 196% increase, this high percentage was achieved because the deemed cost of listing on the PLUS Market, following on from the reverse of Trafalgar New Homes by Combe Bank Homes, in November 2011, meant that the profits for the Group for the sixteen month ended 31st March 2012 (the period needed to coincide with the TRAF accounting period), were reduced.   

Combe Bank Homes made £510,946 profit for the period ended 31st March 2012, as can be seen from the accounts, as filed. Those profits were reduced by the deemed cost of listing and other costs and expenses associated with the acquisition of TRAF to the figure of £208,464, again as shown in the published accounts.  This meant that the figure we achieved of £617,976 for the year ended 31st March 2013 showed a 196% increase from the previous year, whereas in the normal course of events the increase would have been  20%.

For the current financial year ending March 2014, we anticipate an increase on the £617,976 through the sales of the remaining units at Edenbridge and the houses at Oakhurst Park Gardens.

Q12. There are a number of London listed house builders, is there anything that makes Trafalgar New Homes different as an investment case?

The upturn in the market and the Government incentives will of course increase competition within the sector but TRAF must be judged on its own merits and the Board firmly believes we have placed ourselves in a niche market in which TRAF can prosper.  However, we are acutely aware of the necessity to enhance earnings per share, which should lead to an increase in the share price and, therefore, the value of the Company which has to be good for investors, both current and interested parties. Our business model has been adopted because it tries to ally development growth and increased profitability whilst maintaining a risk free business model. Nothing can be said to be completely risk free, of course, but we do believe and, indeed, have always tried to achieve as risk free a model as possible which has proved successful for TRAF and in the previous experience of the Board. As one of the very few residential property developers listed on AIM I believe TRAF represents exceptional value for investors looking to get into an attractive sector.

Q13. Since listing on AIM earlier this year the Trafalgar share price has more than doubled with the market capitalisation currently at around £10m, do you feel the current share price is a fair refection of where the company is at?

We are all very pleased with the performance of TRAF’s share price since listing on AIM. At the current price of approximately 5p the Group has bettered Allenby Capital’s initiation price target of 4.5p set in July.  I believe this could be regarded as fair value, bearing in mind the multiples that most house builders are trading on 18/22 x earnings generally.

Therefore, TRAF appears to be in line with market sentiment but as the Group grows, delivers results and establishes a profile and a confident investor base on AIM we hope to see a steady and sustainable uptick in the share price.

Q14. Is Trafalgar New Homes looking to increase its land bank and actively looking to acquire new building projects?

Of course, TRAF is always looking to increase its land bank and actively seeks new building projects.  Our building stock, i.e. our land for development, is our life blood and needs to be replenished at all times.   As one project finishes, another one must be ready to go.   Continuity of profitability is very important and is the way to ensure that the value of the Company is properly reflected in its share price.

Q15. In summary, what can Trafalgar New Homes shareholders look forward to over the next 12 to 18 months?

Over the next twelve/eighteen months we hope to deliver an increase in profitability for the year ended 31st March 2014 as well as a projection showing that profitability will be sustained through and up to the year ended 31st March 2015 with sufficient activity and deals in the pipeline to justify projections for year end 2016 and beyond.

As a result of the Groups’ profitability there will be an increase in the earnings per share and it is our intention to pay a dividend for the year ended 31st March 2014.

Thanks Chris for taking the time to discuss the various business aspects and for sharing your thoughts.

This interview took place in 2013.

Marine Mews is a development of three pairs of semi-detached 2 bedroom houses in the delightful and thriving seaside community of Walmer, near Deal in Kent. Combe Bank Homes successfully completed the project in 2011, and all the units are now sold.

COMBE BANK HOMES website

Q1. Briefly, could you set the scene with a bit of background on Trafalgar New Homes and its management team?

Trafalgar New Homes plc is an AIM quoted (TRAF) residential development company. In January 2007 Alex Johnson, my son, and I founded Combe Bank Homes Ltd., which focused on residential developments in the South East of England. In November 2011, we reversed the Combe Bank Homes business into PLUS-quoted Trafalgar New Homes plc. Trafalgar New Homes was incorporated on the 14th December 2001 in England and Wales as a public limited company to engage in home building and property development but encountered financial difficulties therefore we used this as reverse-takeover opportunity to publicly list our business. In July 2013, the new Trafalgar New Homes was admitted to trading on AIM.

The TRAF management team has considerable experience of the South East housing market. I am a qualified solicitor and have been a board member of various quoted house building companies during my career. In the 1990s I established Propan Homes which was floated on the OFEX Market and subsequently on AIM in 2001 and acquired Honeygrove Group plc in 2003 before being sold for approximately £9.4m in 2004. Alex Johnson managed an estate agency until 2002 when he joined the family business as Sales Director and now Executive Director. We also have the expertise of James Dubois, Norman Lott and Andrew Moore.