Henry Boot targets double-digit dividend growth

On first impression, Henry Boot (BOOT) seems like a complex company to run. Though it is too small for the FTSE 350 Index, executives must take a view of several interconnected markets – construction, land promotion, housebuilding, and property development – when allocating capital.

Chief executive Tim Roberts sees things more simply. “I would love it to be a really complicated job, because then I would get to sound really intelligent,” he tells us. A better way to view the business is through its three key markets, all of which are benefiting from strong demand.

In residential, strong appetite from larger housebuilders for planning-ready plots drove a 14 per cent rise in land sales in the first half of 2021, while Stonebridge Homes – Henry Boot’s jointly-owned premium housebuilding arm – continues to hit sales ahead of budget.

The industrial and logistics market, which accounts for 72 per cent of the development division’s pipeline, is currently facing a dearth of supply. A step up in investment should contribute more than one million square feet toward closing a UK-wide gap. Urban development work is also motoring, thanks to construction markets that have already filled 80 per cent of next year’s order book.

But a diversity of end-markets also comes with varying degrees of capital strain. Rising input costs in the nimbler parts of the business could hurt margins in the coming months.

Amid fevered private equity appetite for cheaply valued UK equities, might the break-up value of the storied Sheffield-headquartered group attract buyers? Like PE target Morrisons, Henry Boot is a family-founded business whose model is analogous to the supermarket’s ‘fork-to-table’ strategy.

“We like being listed on the stock market,” responds Roberts. “Shareholders like the liquidity, and we like the discipline and rigour of reporting to the markets.”

Be it managerial discipline, structure, or the fact that 43.5 per cent of the shares are controlled by insiders (including many Boot family descendants), long-term stability is reflected in an average annual total return of 13 per cent over two decades, more than double the All-Share. That suggests a medium-term target to generate a 10 to 15 per cent return on capital is achievable, so too “low double-digit” dividend growth.

But how should investors value this business? Inventories, which include the strategic land bank, are worth just under two-thirds of shareholder equity, meaning book value will act as something of an anchor. But a 7 per cent premium to Numis’ 2022 year-end NAV estimate has narrowed, and looks skinny given diverse options for growth, rising consensus earnings forecasts and negligible gearing. Buy.

Last IC View: Hold, 286p, 23 Mar 2021