ii view: Redrow shares gather momentum in July

Growing its regional business, this housebuilder offers a dividend yield of over 3% and the shares are having a strong month so far.

Full-year trading update to 27 June

ii round-up:

Mid-sized housebuilder Redrow (LSE:RDW) today raised its full-year revenue estimate to £1.94 billion from a previous £1.8 billion, as housing demand remained strong despite a curtailing of the Help-to-Buy scheme. 

That’s up from last year’s pandemic scarred £1.34 billion, although still down on 2019’s total of £2.11 billion. At the reiterated operating margin of 15.5%, broker UBS estimates a full-year adjusted profit of over £300 million compared to a current analyst consensus of £285 million. 

Redrow shares rose by more than 2% in afternoon UK trading, bringing the gain in the shares since March 2020 pandemic lows to around 95%. Shares for smaller rival Crest Nicholson (LSE:CRST) have more than doubled in that time, and London-focused Berkeley Group (LSE:BKG) is up by around 50%. 

Reservations per outlet per week for the year came in at 0.70, up from 0.67 in 2020 and 0.63 in 2019. Help to Buy aided sales only accounted for 13% of private reservations in the second half of the year, down from 50% in the prior year.

Demand in the regions for its Heritage homes remained strong, as more buyers reflected on their lockdown experiences and prioritise space in their homes and access to green areas. Redrow previously sold its London operations to focus on the regions, including a new southern division.

Redrow ended the year with net cash of £160 million compared to the prior year’s net debt position of £126 million. The order book totalled £1.43 billion, inline with the year before. 

Sales at the start of the new financial year were summarised as ‘robust.’ Revenue for the year ahead is expected to exceed £2 billion, with the operating margin rising to 18%. According to UBS, that implies 2022 profits of around £360 million, a 10% increase on current forecasts. 

ii view:

Redrow builds homes throughout England and Wales. Its product range is focused on traditional family housing. Legal completions in the year to the end of June totalled 5,620, up from the prior year’s Covid construction hit 4,032, although still below the 6,443 achieved in 2019. Half-year results announced back in mid-February saw Redrow recommencing the dividend payment following its halting under the pandemic.  

For investors, an uncertain economic outlook remains, with UK government finances considerably more stretched following the pandemic. As such, ongoing government support schemes could at some point come under further review. 

That said, this latest update looks to show ongoing robust consumer demand, despite an already reined in Help-to-Buy scheme. An estimated forward dividend yield of over 3% is not derisory in the context of an ultra-low interest rate environment, and current net cash compares to a prior year net debt position. In all, and with analysts currently estimating a fair value price per share of 758p, long-term momentum appears to remain in the company’s favour.  

Positives: 

• Raising sales forecasts
• Dividend payment restarted

Negatives:

• Ongoing economic uncertainty
• A reigning in of government house buyer incentives

The average rating of stock market analysts:

Strong buy