04 September 2017

BLOG: UK House Builders

by Scott Fulton | 4 September 2017

The coming week is a busy one for the UK house builders. As Figure 1 below highlights, we are due to hear from Redrow, Barratt, Berkeley, McCarthy & Stone and Bovis. All of these announcements have a relevance to Persimmon* to a greater or lesser extent.

Figure 1: UK House Builders (performances and announcements)

With a few notable exceptions, the house builders have continued to perform well in recent months, none more so than Redrow which reports its final results (to June 2017) tomorrow. The company does not communicate with the market very often but in its last update (22nd March 2017) it highlighted that it expected to “deliver at least £306.0m PBT”, some 22.0% ahead of the previous year. Note that the low end of PBT forecasts (according to Bloomberg) is £272.0m. The dividend has lagged others in the sector as the company has focused on growth rather than cash. However, the interim payment (6.0p) was increased by 50.0% on the previous period and the market is unanimous in forecasting a total of 15.0p for the year.

Barratt has already announced a lot of the detail for its final results in a trading statement on 12th July 2017. PBT is expected to be “around” £765.0m (2016: £682.3m) with returns (Gross and RoCE) predicted to rise to meet financial targets. Cash balances – critical to house builders’ valuations – were said to be c. £720.0m compared to £592.0m a year previously. Again, dividends will be a focus. The company has set out plans to pay £175.0m to shareholders in November 2017 and 2018 but will also pay a final dividend (in respect of 2017) based on 2.5x cover. Barratt has a recent record of outperforming its guidance.

Berkeley Group is about to re-join the FTSE 100 after a short interlude in the 250. Despite the problems within the London housing market, the company has continued to perform well, particularly in terms of cash generation and cash returns. It comments on London will be watched closely but the key is a continuation of its long term PBT guidance (c. £3bn cumulatively by 2021) and the cash returns to shareholders (a further £8.00 per share over the four years after this month).

The UK business media is likely to focus on Bovis Homes. Its fall from grace in December 2016 was high profile and there have been significant column inches devoted to its potential recovery. Greg Fitzgerald (ex-Galliford Try) is now CEO and his strategic review is almost at an end. The company’s guidance on volumes, margins and cash generation is critical to the underlying support for the current share price.

McCarthy & Stone’s position as the largest “retirement home provider” in the UK marks it out, not least as its target market tends to be long of housing in a weaker second hand market and cannot benefit from “Help to Buy”. It is the worst performing house builder over the last 12 months as forecasts have come under pressure from weakness in the “trading down” market. Current year guidance will be watched closely.

Overall, it is likely that the “pure” house builders (Redrow and Barratt) will report strong performances, possibly ahead of their own guidance. If this is the case, it is equally likely that there will be further demand for their peers (e.g. Persimmon).

Bovis is such a special situation at this point that its comments are unlikely to impact the sector unless they are materially bearish on the macro background.

Berkeley’s comments on London may impact others (e.g. St Modwen, Telford Homes and the estate agents) but do not offer a straight read-through. McCarthy & Stone is too specific and may not have a relevance to the remainder of the sector.

*Capital Access Group acts for these companies.