Is this housebuilder worth 44% more?
14th August 2018 14:17
by Graeme Evans from interactive investor
Despite gloom in the housebuilding sector, UBS analysts continue to see big potential for one particular well-known stock. Graeme Evans reports.
It's been a pretty depressing summer for investors in the housebuilding sector, with a number of stocks sharply lower in the face of a slowing property market, deepening Brexit worries and a further rise in operating costs.
Redrow shares have been among the casualties, with the FTSE 250 stock down by 20% since it reported half-year results in February. However, UBS analysts are confident this reflects a de-rating of the sector and softer earnings from some homebuilders, rather than weakness on Redrow's part.
In fact, a note published by UBS today said Redrow was "flying under the radar" and now presented "an attractive buying opportunity" at a discounted valuation. The broker's 12 month price target of 765p compares with a current level of around 528p, a rise of more than 44%.
Redrow is due to report full-year results on September 4, when UBS expects the company to post earnings per share (EPS) growth of 17% to 82p, based on a 6% rise in volumes and an improved operating margin of 19.8%.
The broker thinks the results will show Redrow is still on track to achieve its 2020 full-year targets for revenues of £2.2 billion, pre-tax profits of £430 million and EPS of 95p.
This will be achieved thanks to around 9% revenue growth per annum in 2019/20, which will be driven by a step up in site count as “Redrow leverages on its past strategy of retaining capital and reinvesting heavily into land”.
Operating margins are expected to hold firm at 20%, with the expansion in the business helping to offset pressure from house price weakness and cost inflation of 3% to 4% reported recently by other housebuilders.
Overall, UBS said Redrow is on track with its medium-term targets, which imply 37% profits growth over 2017 to 2020 despite the challenging conditions.
New 2021 targets could also be announced with next month’s results, with UBS forecasting revenues of £2.3 billion, pre-tax profits of £464 million and EPS of 105p.
They added:
"We see Redrow's investment case unfolding with a catch-up to the sector ROCE, significant cash generation and some potential for higher dividends."
UBS has a projected yield of 4.9%, rising to 7.5% by 2020.
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