Cairn Homes upgrades guidance

The domestic focus of Irish housebuilder Cairn Homes (CRN) has plenty of things going for it. On top of state support via Dublin’s ‘Housing for All’ strategy, there is strong demand, structural undersupply, growing orders, a land book worth €676.2m (£577m), and a 12.5 per cent corporate tax rate thrown in for good measure.

Given this backdrop, investors might well wonder why the group trades just 12 per cent above net asset value, when a UK-based powerhouse like Persimmon (PSN) is priced at more than twice its balance sheet equity. House price inflation has been common to both countries, after all.

One reason is Cairn’s gearing, which is typically higher than peers this side of the Irish Sea. But things are moving in the right direction here: in the first half of 2021, a combination of rising earnings and land release led to a €18.9m drop in net debt. This was despite a 13-week site shutdown caused by the first quarter lockdown.

The bigger cause of this depressed valuation is profitability. Be it economies of scale, differing standards or varying effects of cost inflation, Cairn’s operating profit margin was 8.9 per cent in the first half of 2021. Compare that with Persimmon, which generated a 26 per cent margin in the same period.

On this front, management is guiding for progress, too. Analysts at Numis expect full-year operating profits to gallop to €51.7m, in line with guidance, which translates to earnings of 5¢ per share. In 2022, the broker estimates EPS will hit 8.9¢. We await further signs of progress. Hold.

Last IC View: Hold, 112p, 8 Mar 2019