ii view: Redrow downgrades forecasts as sales slip

Shares for this mid-sized housebuilder are down by around a third year-to-date. We assess prospects. 

First-quarter trading update to 6 November

• Private reservations per outlet per week down 28% to 0.49
• Forward order book down 9% to £1.36 billion
• Net cash held of £187 million, down from £297 million a year ago

Guidance:

• Now expects full-year revenue of £2.1 billion, down from a previous £2.3-to £2.4 billion
• Expects profit margin of 18%, down from 19.3% last year
• Expects to have net cash of over £150 million come the end of June

Chairman Richard Akers said:

"The housing market had returned to normal following the elevated sales rate in the previous two years. However, recent instability in financial markets has had a negative impact on the housing market and the business has had to adapt to the changing economic outlook.”

ii round-up:

Similar to rivals, FTSE 250 housebuilder Redrow (LSE:RDW) today detailed falling sales over recent weeks, hit by instability in financial markets following the Truss government’s mini-budget.

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Private sale reservations per week fell by just over a quarter to 0.49 per outlet during the 18 weeks to early November. As such, full-year revenue is now expected come in at £2.1 billion, down from management’s previous hopes of up to £2.4 billion, with a profit margin of around 18% forecast compared to last year’s 19.3%. 

Redrow shares remained little changed in UK trading having come into this latest announcement already down by around a third year-to-date. Shares for larger rivals Taylor Wimpey (LSE:TW.) and Persimmon (LSE:PSN), which also both recently issued trading updates, are down by around 40% and 50% respectively during 2022. The broader FTSE 250 index, and often seen as representative of the UK economy, is down by more than 15% year-to-date. 

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In mid-September, Redrow reported a return to record adjusted profits of £410 million for the year to the end of June, above the £406 million its generated in the pre-pandemic 2019. 

Redrow’s forward order of £1.36 billion as at 6 November compares to £1.49 billion this time last year, with a similar to last year 73% sold or exchanged rate achieved. 

A near 7% increase in the average selling price to £483,000 supports management hopes for full-year revenue to at least remain unchanged year-over-year at £2.1 billion, despite the recent fall in volumes.   

Redrow added 724 plots to its land bank during the period, around half of the plots acquired last year with management a more selective approach given the uncertain economic backdrop. 

First-half results are scheduled for 9 February. 

ii view:

Started in 1974 as a small civil engineering concern in North Wales, Redrow today builds homes throughout England and Wales. It previously sold its London operations to focus on the regions. Its product range is focused on traditional family housing. During its last financial year, Redrow delivered just over 5,700 housing units, up from 5,600 the year before. 

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For investors, a highly uncertain economic backdrop including rising interest rates and likely tax rises cannot be ignored. Ongoing build cost inflation warrants consideration, too, as does reduced cash held year-over-year and the potential for the dividend to be cut given a more challenging outlook. 

On the upside, an estimated price to net asset ratio of under one compared to a three-year average of more than one may suggest the shares are not expensive. Exposure to London was previously removed, provisions in relation to cladding and fire safety have already been made, while potential for industry consolidation over time appears to persist. 

On balance, and while a good dose of caution is clearly sensible, a significant quantity of bad news is arguably already in the price, with longer term investors likely to stay patient. 

Positives: 

• Focused region builder having sold London sites
• Net cash held

Negatives:

• High economic uncertainty
• Continued build cost inflation

The average rating of stock market analysts:

Buy