Galliford Try has a housebuilding operation that, like other large housebuilders, has benefited from a combination of cheaper land and pent-up demand for new homes. What's equally impressive is the way its construction side has held up so well.
- Housing completions at a record high
- Large land bank with increased south-east exposure
- Construction order book maintained
- Net cash
- Construction margins under pressure
- Pressure on big projects
That's because the construction industry is in a vicious downward spiral, with companies chasing a dwindling pot of new work, resulting in a tightening squeeze on profits. True, there are some big plans to boost spending on the UK's infrastructure, but these will take time to come to fruition. So it's impressive for Galliford to maintain its construction order book at £1.6bn; that includes some major contracts, such as the £347m Gateshead regeneration programme and a £180m scheme to upgrade and extend Liverpool's waste water treatment works. In fact, 82 per cent of projected revenue for the year to June 2013 has already been secured, a rise from 80 per cent this time last year.
Part of the success in maintaining the order book comes from having a diverse revenue stream, with around 44 per cent of work coming from regulated sector - such as gas, water supply and water treatment - another 43 per cent from the public sector and the remainder from the private sector. Still, management has to remain selective in taking on new work simply to maintain profit margins which, on the construction side, are lean - in the first half of 2011-12 they were 2.2 per cent, down from 2.5 per cent a year earlier.
In housebuilding, Galliford completed 3,039 units in 2011-12 - that's a record, and 40 per cent more than the year before. The average selling price for private homes was £250,000, up 10 per cent on the year, and the value of housing sales carried forward was up 11 per cent at £273m.
Simultaneously, management has been improving the quality of the group's land bank, with 81 per cent of its 10,500 plots bought at current market values. Furthermore, all the plots for construction in the year just begun have been secured, as have 87 per cent earmarked for construction in 2013-14. And Galliford is operating chiefly in the south east of the country, where 75 per cent of its land bank is located and the economy is relatively resilient. All this has helped profit margins on housebuilding, which jumped from 6.5 per cent in the first half of 2010-11 to 11 per cent in the first half of 2011-12. In addition, profits from land sales boosted margins to 12.6 per cent.
| GALLIFORD TRY (GFRD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 631p | MARKET VALUE: | £517m | |
| TOUCH: | 629-631p | 12-MONTH HIGH: | 656p | LOW: 346p |
| DIVIDEND YIELD: | 5.4% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 573p | NET CASH: | £20m | |
| Year to 30 Jun | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 1.46 | -26.9 | -34.4 | 10.9 |
| 2010 | 1.22 | 19.2 | 14.7 | 12.5 |
| 2011 | 1.28 | 41.7 | 40.3 | 16.0 |
| 2012* | 1.69 | 63.1 | 60.0 | 30.0 |
| 2013* | 1.68 | 72.0 | 68.5 | 34.0 |
| % change | -1 | +14 | +14 | +13 |
Normal market size: 600 Matched bargain trading Beta: 0.9 *Peel Hunt estimates (profits and earnings not comparable with historic figures) | ||||
The group also has a modest portfolio of public-private investments, which generated operating profits of £1.1m in the first half. But there is very little activity in England as a result of a government review into this model of capital spending, although significant projects are still being pursued in Scotland.
Galliford's success means its three-year growth plan set out in 2009 has been achieved and in parts beaten, and the next stage is now in hand. This includes increasing gross margins on housebuilding by three percentage points by 2015 through productivity gains. This could be important because analysts at broker Peel Hunt calculate a fair value for Galliford of 825p a share. If, however, the targeted margin growth is delivered, that would boost their value calculation to 925p a share, far above the current share price.
Group finances are in pretty good shape, too. Thanks to solid cash generation, Galliford turned net debt of £70m in December into £20m of net cash by June. It has also reduced its upfront expenses by securing more land on deferred terms. And it has in place a £325m borrowing facility that runs until 2015.
