Redrow outperforms analysts' expectations in weak market

Compared with some peers, Redrow (RDW) has not been as negatively impacted by the end of Help to Buy due to its target market of wealthier buyers, but it is far from immune from the rise in interest rates. The housebuilder posted a 4 per cent drop in adjusted pre-tax profit in its annual results, which removes the post-Grenfell cladding costs it recorded last year.

Still, this was a better-than-expected performance amid the housing slump. The £395mn in adjusted profit before tax beat analyst consensus of £365mn, which analysts at Jefferies described as “reassuring”. After all, many of its peers posted much deeper falls in income as higher interest rates continued to put off buyers.

Things look set to get worse before they get better, however. Forward sales have slumped by 41 per cent year on year, and Investec anticipates revenue and profits for the 2024 reporting year will sink accordingly before growing again in the 2025 reporting year. 

It is hard to see how anything will change that outcome. Buyers are struggling, and Redrow does not tend to benefit from the sort of supply-side policies that governments like to introduce – such as Help to Buy – because its homes are much larger and more expensive than its peers. 

At the start of the housing downturn, this made us somewhat bullish on Redrow, as higher-income buyers tend to use more cash and are not as impacted by interest rates. But, the housebuilder's results and forward sales figures show, the wider malaise is now starting to feed through. 

By contrast, its rival Vistry (VTY) enjoyed a share price boost as it revealed a complete shift towards solely building “affordable homes” for bulk sale to institutional investors, social housing providers, and local authorities. Some of those homes would then be leased, while others would be used for shared ownership. Other housebuilders, such as Barratt Developments (BDEV), have also done bulk sales to boost revenue in their most recent results.

“We don’t tend to go down that route,” chief executive Matthew Pratt told Investors’ Chronicle. “I would say we’re looking at it, but on a very small, tentative basis. Just putting our toe in the water.”

In terms of valuation, Redrow looks like a contrarian investment. It is cheap on a net asset value, price/earnings, and dividend yield basis. However, its forward sales figures, analyst consensus, and the macroeconomic picture emphasise things will likely get worse before they get better. As such, we maintain our cautious rating. Hold.

Last IC View: Hold, 534p, 09 Feb 2023