Galliford Try's (GFRD) construction business offers bags of recovery potential while its house-building operation is currently in a sweet spot which is powering strong earnings and dividend growth. This looks a particularly attractive business mix at the present time but Galiford's rating does little to recognise its virtues, and there is an attractive prospective dividend yield on offer to boot.
- Strong housebuilding division
- Construction arm poised for recovery
- Hefty dividend
- Minimal debt
- Construction margins being squeezed
- Big project spending yet to materialise
Pent up demand for new houses is resulting in a sharp increase in activity thanks to record low interest rates and government incentives to help first-time buyers that has seeded a housing boom that looks set to run. In this environment it would be easy for Galliford to adopt a 'pile 'em high and sell 'em cheap' strategy for its housebuilding business. However, it is actually taking a more disciplined approach that centres on building higher-quality homes in the more affluent parts of the country - notably the South, where the group has three-quarters of its operations.
This approach is paying off nicely, with operating margin in the year to June rising from 11.8 per cent to 13.1 per cent. And management reckons that by 2018 this could rise further to around 18 per cent. For the current year to June 2014, all the land for projected output is already in place, with 90 per cent visibility also secured for the year after. And despite Galiford's more selective approach, forward sales at the year end were up 16 per cent to £405m.
To meet rising demand, the land bank has been increased to a record 11,300 plots, and the proportion acquired at current (cheaper) market prices has risen from 81 per cent last year to 86 per cent. Moreover, the gross development value rose 14 per cent to £2.76bn last year, and there are a further 1,522 acres held in the strategic land bank. Acquiring more land used up the group's cash pile, but even so, net debt at the year-end was a modest £14.4m. True, average net debt throughout the year was £134m but this was still comfortably within the group's £325m banking facility.
| GALLIFORD TRY (GFRD) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,104p | MARKET VALUE: | £904m | |
| TOUCH: | 1,104-1,105p | 12-MONTH HIGH: | 1,111p | LOW: 663p |
| FORWARD DIVIDEND YIELD: | 4.7% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 612p | NET DEBT: | 3% | |
| Year to 30 Jun | Turnover (£bn) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 1.32 | 36.0 | 32.4 | 16.0 |
| 2012 | 1.58 | 64.1 | 60.5 | 30.0 |
| 2013 | 1.56 | 75.1 | 71.1 | 37.0 |
| 2014* | 1.57 | 84.0 | 79.6 | 43.0 |
| 2015* | 1.64 | 98.0 | 92.8 | 52.0 |
| % change | +4 | +17 | +17 | +21 |
Normal market size:1,000 Matched bargain trading Beta: 0.81 *Numis estimates, underlying PTP and EPS numbers | ||||
Galliford also has a significant construction operation that last year accounted for 62 per cent of group turnover, although only 15 per cent of profit. True, operating margins were skinny, falling from 2 per cent to 1.7 per cent, a trend that management expects to bottom out at around 1.4 per cent and compares with a 2.5 per cent peak in 2009. And profits last year dipped from £18.9m to £15.1m, mainly as a result of continued delays in the much promised resurgence in infrastructure spending. However, the order book has been maintained throughout the downturn, and in the year to last June actually increased marginally to £1.7bn, which is one of the most resilient performances in the sector.
Analysts at Jefferies reckon that a good base-case valuation for the house building side is a rating of 1.6 times book value - that’s cheap compared with rivals such as Persimmon and Berkeley Group - making this part of the group worth 993p per share. That means that the construction side accounts for just 111p of the share price, which values this part of the business at a modest discount to the sector average rating of 11 times forecast 2014 earnings, despite the operation being one of the best performers. That seems unjustified.
