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Cheap Redrow plays catch-up

Redrow was a mess seven years ago, but it has recovered well and there should be further mileage in the housebuilder.
March 17, 2016

"If I had returned before five months ago, we would probably not be in as big a mess as we are now". So said Redrow's chairman, Steve Morgan, in September 2009, when he came back, after leaving the board in 2000, to rescue the housebuilder he founded 35 years earlier. Since then, Redrow has come on in leaps and bounds, recently doubling its half-year dividend. But it's still cheap compared with its rivals, which suggests there is room for upside.

IC TIP: Buy at 415.4p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Record profits
  • Strong forward order book
  • Cheap rating
  • Reduced exposure to inner London
Bear points
  • Dividend still modest
  • Return on capital employed stalled

Back in 2009, in Mr Morgan's absence, Redrow had been chasing land when prices were already looking stretched, and building less expensive houses. After legal completions fell in that year, gross margins collapsed from 18.5 per cent to just 1.8 per cent and there was a near-£100 write-down on the land bank.

 

 

Fast forward seven years and trading in the six months to December 2015 brought record profits. Legal completions grew by 18 per cent to 2,178, and the average number of sales outlets grew from 101 to 121. And things look good going forward, with the private order book ahead by 51 per cent from a year earlier at £655m. Average selling prices were up a relatively modest 2 per cent, but this actually reflects neat a strategic move that has shifted Redrow's focus away from high-priced central London apartments at a time when the top-end of the market slowed rapidly. Emphasis now is on the more fashionable outer London commuter market, where average selling prices were up 11 per cent at £300,000. And with cost price inflation moderating, gross margins grew from 22.3 per cent to 24.2 per cent.

REDROW (RDW)
ORD PRICE:415.4pMARKET VALUE:£1.54bn
TOUCH:415-416p12M HIGH:505pLOW: 337p
FORWARD DIVIDEND YIELD:3.2%FORWARD PE RATIO:7
NET ASSET VALUE:246pNET DEBT:20%

Year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20130.607014.81
20140.8613328.33
20151.1520444.66
2016*1.3223050.710
2017*1.4726558.413.5
% change+11+15+15+35

Normal market size: 3,000

Matched bargain trading

Beta: 0.74

*Peel Hunt's estimates

It's possible that sales numbers could grow even faster, but the ability to bring new outlets on-stream is being hampered by the still largely dysfunctional local planning system. Around 9,000 plots or 42 per cent of the current land bank covering 60 new outlets is tied up in the planning system.

Most housebuilders are experiencing the same solid trends and frustrations. What sets Redrow apart is that despite its strong recovery, its valuation looks cheap compared with rivals. Its price to forecasst net asset value to June 2016, for example, is just 1.4, which is well below the sector average of 1.9, and, with the exception of Bovis (BVS), is the cheapest in the sector. Its PE ratio is also one of the lowest at eight, dropping to seven on 2017 EPS forecasts. Set against this, the return on capital employed at the half year was stuck on 21 per cent, which is slightly below the sector average. And while the dividend is forecast to continue to shoot up, the current yield has some catching up to do.