Stockwatch: will the property boom continue for these stocks?

Once lockdown lifted the UK property and renovation markets boomed, and some companies stand to benefit, according to our companies analyst.

August has heralded the busiest month in a decade for house sales – over £37 billion already – where normally the summer holiday period sees a slowdown. It appears pent-up demand from the lockdown is rolling forward and there are enough people not going on holiday with time on their hands.

Skips have taken away clutter and lucky furloughed folk were also able to spruce up their interiors while on 80% pay. A working-from-home revolution prompted desire to re-locate to more pleasant surroundings, and a stamp duty holiday is also a current trigger. This is why larger home sales are up nearly 60%, versus 30% for first-time buyers and 40% for mid-tier properties.

The big question is whether it has all broken lethargy and if normal behaviour will now mean more active buying and selling. A possible current risk is lender delays in mortgage underwriting, although such is the extent of wealth inequality nowadays it would be wise not to underestimate a powerful cash market. 

Popular speculative stocks attract most attention

This latest data explains why key stocks have started this week strongly, despite in some cases already racy valuations.

At 631p Rightmove (LSE:RMV), the £5.5 billion online property portal enjoys a price to earnings (PE) ratio of around 53x projected earnings for this year, easing to 32x in 2021.

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A growth stock profile is reinforced by a sub-1% prospective yield. It is the obvious ‘story’ play, able to benefit in a speculative market, if very fully pricing in prospects. 

At 81p Purplebricks (LSE:PURP) is a £250 million estate agency stock with an earnings record as an anchor for valuation, hence its price can move fast according to charts and narrative. 

Already this week it is up 12% having started a run from 47p at end-July. Profitability is not expected until the financial year ending April 2022, for which the consensus target is £1.3 million net profit and earnings per share (EPS) of only about 0.1p given the 307 million shares issued.

This more soundly valued AIM stock is rising too

Recovery of larger home sales ought to be mean more people revamping interiors. So there is scope for AIM-listed Walker Greenbank (LSE:WGB) to sell more of its quality wall-coverings and other items.

Despite a rise from 45p to 53p in a week, Walker’s capitalisation is only around £38 million and partly reflects an 11 August trading update that cited an improved trend since April, gaining momentum.

If consensus is fair that the company will make around £1 million net profit this financial year to end-January 2021 recovering to £5.5 million, the prospective PE is about 11x reducing below 7x – a marked contrast to the agency type stocks.

Moreover the last annual results showed net asset value of £64.8 million, or 91.3p a share. That is, if you include £29.8 million intangibles, but it appears fair to do this given strong brands such as Sandersen, Morris & Co, Harlequin and Zoffany.

Subtracting that gives net tangible asset value of 49.3p a share, hence unlike Rightmove and Purplebricks this one has an intrinsically sound risk/reward profile.

Still is only a quarter of its 2014 to 2017 market value

Walker’s past trouble has been sensitivity to a more challenging trading environment in recent years that meant a big de-rating from the 180p to 230p range enjoyed during 2014 to 2017.

It is as if investors had begun to question if wall-coverings were losing popularity, rather than, say, Brexit hurting consumer confidence. 

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For example, Walker’s mid-2018 trading updates cited a 7% decline in brand sales in the UK replicated by international brand sales down 4%. Licensing income has typically mitigated this volatility, which also brings into question whether brands warrant much, if any, premium value. After all, there seems yet to be any takeover approach.

Similarly the latest update has cited first-half total brand sales down 28%. The UK, Walker’s largest market, was down 31% and international sales were down 24% with the US (second to the UK) down 32%. 

Mirroring past experience, licensing income eased only 10%. A global sales slump does however reflect the lockdown period during which, although some people were active with paint brushes, if buying premium wallpaper I would certainly want professionals putting it up. 

Improving sales trend gathers momentum

Management cites this from last April, albeit no figures as yet. There was a strong end to the first-half year to July for Clarke & Clarke bed-linen and cushions, also Morris & Co wall-coverings and curtains – especially in Scandinavia – if rather typical of company updates to highlight best performers in a portfolio.

The chief executive says: “We remain cautious...given Covid-19 continues to create uncertain conditions” which indeed they may be, although it is wise financial PR to put out a wary tone to mitigate the risk of any disappointment later. Formal guidance seems eschewed and the forecast rebound in 2021/22 may owe more to stock brokers’ hopes.

In terms of company evidence then, signs of recovery are early-stage, but investors are picking up on larger home sales’ gathering pace – as a forward indicator of demand for wall-coverings and interior fabrics. 

That seems logical, especially given this stock’s valuation had drifted below net tangible assets, despite suspension of dividends since last year’s interim payout. Also, people’s outgoings may well be compromised by not being able to go on fancy holidays or spend so much in restaurants and bars, such that relatively affluent people in secure jobs have plenty of cash to indulge home luxuries.

Resort to government support may compromise dividend restoration 

March and April updates had shown Walker relatively hard-hit by Covid-19, with factory and showroom closures plus accessing government support mechanisms “wherever possible” both at home and abroad. 

Most employees were furloughed and salary reductions of 20% all round were applied. According to how cynically you view business ethics, firms that rushed into substantial government support should not reinstate dividends until the pandemic is well past.

This latest update cites “robust” liquidity with end-July cash headroom against banking facilities increased to £19.5 million versus £16 million as reported in the accounts to end-January.

However, any actual increase in debt is not quantified beyond a modest £1.7 million near-term debt on the end-January balance sheet. 

Directors and associates’ recent buying at 37p to 42.5p

Once out of the closed period on dealings, in early July a non-executive director added 52,500 shares to his existing 22,500 stake at 37p. As the price rose to 42.5p the chief executive’s husband bought 46,989 shares, which is registered as her holding. A smaller 3,116 position was acquired also by the partner of the group human resources director, at 36p. 

The price marked time thereafter until this sense about fresh momentum in the housing market, as the stock barely moved around 45p in response to last Tuesday’s update.

In a key respect these buyers are getting lucky due to the macroeconomic context improving, but they have made their luck – and is soundly based – backing intrinsic value rather than traders chasing momentum at Rightmove and Purplebricks.  

Otherwise there is not much extra grist to the story. A children’s collection has been launched by the Harlequin wall-coverings and home-wares business, employing digital design and said to have achieved “great initial feedback from our trade partners”. Good, but brands need regular refreshing by way of new initiatives anyway. The next key news is likely to be the interim results in October. 

I sense an improving housing market will continue to support this stock, hence I upgrade my stance from ‘hold’ last February at 78.5p. The spoiler would seem to be children back at school from September leading to more viral spread hence disruption, with the flu season also causing confusion with Covid-19. Yet all this mask-wearing and social distancing may help suppress all germs. ‘Buy’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.