Interactive Investor

Housebuilders continue recovery as investors chase value stocks

10th February 2022 13:26

Graeme Evans from interactive investor

They’ve taken a bashing this year, but a rush of positive updates is attracting buyers. Our City expert reports on latest results from the sector.

Housebuilders continue to make light of their depressed valuations after Redrow (LSE:RDW) and low-cost developer MJ Gleeson (LSE:GLE) today became the latest firms to post robust updates.

The industry has endured a torrid start to 2022, driven by fears over inflation and higher interest rates and the threat of a £4 billion bill to resolve cladding and fire safety issues.

Shares fell by more than 10% in January but have picked up in February after a number of reassuring updates, including from Barratt Developments (LSE:BDEV) and Bellway (LSE:BWY) this week.

Barratt, whose shares have been at a 14-month low, said there were few signs of a cooling in the housing market amid stronger-than-expected demand. A pick-up in construction activity means it now expects to complete more than 18,000 homes, while margins should also improve to over 19% despite the ongoing cost pressures.

Today, it was the turn of Redrow and MJ Gleeson in the spotlight, both of whom already have plenty of support in the City. The latter was recently named by Liberum as one of its two top picks in a sector where the broker has “buy” recommendations on all eight builders.

Liberum said the company's focus on the undersupplied low-cost housing market meant it justified a premium valuation and a price of 1,100p, compared with today's level of 722p. Shares today eased 4p despite the company forecasting that results for the year to 30 June will be ahead of market expectations.

Gleeson reported half-year profits 22% higher at £24.7 million, a figure that beat Liberum's expectations by 31%. The number of homes sold rose 14.9% to 932, with a reduced reliance on Help to Buy as the percentage of buyers using the scheme reduced to 55%.

Chief executive James Thomson added: “Demand for our much-needed affordable homes continues unabated.”

The average selling price for homes sold in the period increased 14.7% to £161,200, but Gleeson said the cost of owning one of its homes was still significantly lower than the cost of renting and will remain so even with modest interest rate rises.

Gleeson Homes builds only low rise housing, but is embroiled in the cladding story as it will have to make contributions to the cost of addressing historic failures in the industry.

Peel Hunt and Liberum have both said they believe the final cladding bill will end up being lower than the £4 billion forecast and shared across housebuilders, materials companies, consultants and insurance companies.

Redrow is in a similar position to Gleeson as it is predominately a builder of family detached houses, with only a relatively small number of high-rise apartment schemes.

Chief executive Matthew Pratt said today it was important the “whole industry plays its part in tackling the cladding issue, not just housebuilders”. He pledged to continue discussions with government to resolve this “complex issue for the benefit of all leaseholders”.

His comments came as Redrow reported a 17% rise in pre-tax profits to £203 million after generating record first-half revenues of £1.05 billion.

House price inflation continues to exceed build cost inflation and Redrow's operating margin has returned to a normalised level of 19.5% one year ahead of previous guidance.

The interim dividend has increased 4p, with the 10p a share due to be paid on 8 April part of the company's return to a 33:67 payout ratio.

Shares today rose 7.2p to 632.6p as Redrow said demand for its larger family-oriented housing remains strong as its forward order book expanded from £1.4 billion to £1.6 billion.

Peel Hunt believes the FTSE 250-listed stock has the potential to reach 910p after adding 10p to its target price. The broker added: “The group has pushed harder on price and less so on volume in order to maximise its profitability.”

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