Cairn remains sturdy even as Irish housing market wobbles

For a while, it seemed as if the Irish housebuilders were immune to the interest rate malaise hitting their UK counterparts. But no more. Cairn (CRN) slashed its pre-tax by nearly a quarter as Ireland's housing market turned sluggish. The most recent government data reveals annual house price growth slowed to 2.2 per cent for June, its slowest pace since December 2020, due to rising interest rates. However, the UK’s market is weaker still, recording annual house price growth of 1.7 per cent for June.

Investors should bear this in mind when valuing Cairn. After all, it isn’t just that Ireland’s house price growth is stronger than the UK’s. It’s that Irish housebuilders don’t have to deal with the end of Help to Buy, post-Grenfell cladding costs, or a government competition watchdog probing their practices. British housebuilders do, and it’s hurting them.

Also, unlike its British peers, Cairn’s forward sales have surged by a third compared with the previous year. The €1.01bn (£863mn) worth of closed and forward sales marks the best order book Cairn has ever recorded, and it appears to have taken the housebuilder somewhat by surprise, with it revising its guidance for the year upwards as a result. The stonking forward sales figures appear to be driven by interest rates. They are not as high as in the UK and have not put off buyers to the same extent, with mortgage approvals still increasing.

There could be one of two things going on here. Either the Irish housing market is already primed for recovery after a much shallower downturn, or the downturn is taking longer to feed through than it has in the UK. It is impossible to know for sure, but Cairn is confident in the medium term. Its surging forward sale figures and improved guidance were accompanied by a dividend bump and some pretty bullish rhetoric.

“Total housing output in Ireland is likely to remain unchanged at circa 30,000,” it said. “Against this backdrop, we are pleased to be increasing our year-on-year delivery by nearly 20 per cent.” In other words, supply is low, and demand is high.

Not everything about Cairn is better than its UK rivals. While most British housebuilders are sitting on net cash, Cairn has increased its net debt to 32 per cent of its total equity. The company also has negative net cash flows from operating activities. 

Still, its pace of growth makes this less concerning. And we feel Cairn's narrow premium to its net asset value shows the equity market is undervaluing this stock, although investors will require patience given the stalled property market. Buy.

Last IC view: Buy, 86p, 3 March 2023