In a crowded housebuilding sector, the shares of mid-cap Redrow continue to demand attention after one City analyst today forecast a 30% upside for the "high-quality stock".
In a crowded housebuilding sector, the shares of mid-cap Redrow (LSE:RDW) continue to demand attention after one City analyst today forecast a 30% upside for the "high-quality stock".
Redrow shares already trade close to a record high, with reassuring full-year results earlier this month helping to boost the FTSE 250 company by 11% overall to today's 624p.
UBS's Gregor Kuglitsch, however, notes that Redrow's price/earnings (PE) multiple of 5.8 times still leaves the housebuilder trading at a 20% discount to the rest of the sector. He upgraded his price target by 9% to 815p this morning, implying a total shareholder return upside of more than 40% across a 12-month view.
Kuglitsch said the key pillars of his buy thesis remained in place after this month's results, with forecasts for 2020-23 pointing to an average 19.5% for return on capital employed and an average free cash flow of about £270 million.
The trading environment also appears healthy despite Brexit, with sales growth of 5% in the first nine weeks of the financial year reinforcing forecasts of 3.5% for the year as a whole. The bulk of this rise will come from volume growth due to Redrow's higher number of outlets.
Source: TradingView Past performance is not a guide to future performance
On margin pressure, which is one of the biggest concerns facing the sector, Redrow reassured that its cost actions and higher average selling prices would mitigate build inflation.
Higher investment in land means that Kuglitsch doesn't expect a special dividend from Redrow in 2020, but adds there remains capacity for a resumption in 2021 onwards. That view is shared by analysts at Deutsche Bank, who said another 30p top-up dividend was unlikely in 2020.
Deutsche has maintained a "buy" recommendation but its analysts now value the stock at 704p rather than 728p in order to reflect the likely absence of next year's special dividend.
Despite this downgrade, they said Redrow remained one of the industry's strongest performers after it appeared in the top half of the sector's league tables for gross margin, operating margin and return on capital employed. They added:
"Redrow's operational performance can hold a candle to most of its peers."
Redrow has been a major beneficiary of the Government's Help to Buy scheme, which accounted for 1,881 private reservation in the last financial year. From April 2021, the scheme will only be available to first-time buyers while regional price caps will also be introduced ahead of the stimulus measures being withdrawn completely in March 2023.
The company plans to deal with the changes by attracting more buyers in the secondary market who would not ordinarily consider a new property.
Earnings per share were up 8% to 92.3p in the recent annual results, which were a record for a sixth year in a row. Redrow completed 6,443 homes, up 13% on the previous year and passing the 6,000 milestone for the first time. The full-year dividend rose 9% to 30.5p a share.
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