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Telford Homes (LSE: TEF) is benefitting from London’s “chronic” housing shortage according to a trading update from the company, published today. 

According to the update from the homebuilder, the shortage of homes in the capital has allowed it to shrug off any market uncertainty during the first half of its financial year. The firm focuses on affordable “non-prime” areas of London and is working with institutional landlords such as M&G Real Estate and Greystar to help them build out their “build to rent” portfolio. 

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However, even though trading is robust, management believes that due to the timing of home sales, pre-tax profits for the six months to September 30 are likely to be lower than last year. Still, management stresses that this fall in profitability is “purely down to development timings which are all on track.” 

A cheap buy 

For the full-year, the company believes that it is on track to meet market expectations for full-year profits of more than £40m. Based on this forecast, shares in Telford are currently trading at a forward P/E of 8.5, which seems execptionally cheap compared to the company’s steady growth and bright outlook. 

Thanks to rising London home prices, and the government’s help-to-buy scheme, Telford’s earnings per share have jumped threefold in the past five years, and analysts are predicting growth of 29% for this year, and 18% for the year to 31 March 2019. Not only are shares in the homebuilder dirty cheap, but they also support an attractive dividend yield of 4.2%. 

Room for dividend growth 

The payout is covered more than twice by earnings per share, so there’s plenty of room for further payout growth, and a wide margin of safety if earnings fall. Based on City estimates, for the fiscal year ending 31 March 2019, Telford is trading at a forward P/E of 7.2, around 40% below the sector average multiple of 10.3. According to my calculations, if the shares can command a sector average multiple, including dividends, over the next two years Telford’s shareholders could see a return of more than 50%.

Trading below book value

Inland Homes (LSE: INL) is another dirt-cheap homebuilder with the possibility for substantial gains. The shares trade at a forward P/E of 8.3, which is 24% below the sector average and the shares also trade at a deep discount to the company’s net asset value. 

According to the firm’s preliminary results for the year ended 30 June 2017, the reported net asset value at the end of the period was 92p per share, approximately 40% above the price the shares are trading hands at today. 

Inland’s shares only support a dividend yield of 2.9% at present, but the payout is covered 4.4 times by earnings per share. What’s more, the firm is returning cash to investors via a share buyback. 

Management recently announced that the company would buy back 1m of its shares. This is a savvy move as the company is only paying 67p in the £1 for these shares. In my opinion, this is a much more efficient method of returning cash to investors as there’s no double taxation and Inland is not wasting money on unneeded acquisitions. If the shares rise to net asset value, the upside here could be 40% or more. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Inland Homes. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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