Cairn Homes exploits housing shortfall

Trading conditions for Cairn Homes (CRN) weren’t entirely favourable through much of last year, but it has shown a degree of resilience compared with some of its industry rivals across the Irish Sea. The Ireland-based homebuilder delivered a 10 per cent increase in operating profits to €113mn (£96.7mn) with an underlying margin 30 basis points to the good at 17 per cent.

More importantly, the company exited the year with a 65 per cent unit increase in its closed and forward sales order book, representing a 77 per cent hike in monetary value to €946mn. Its “strongest ever financial and operational performance” translated into 1,741 sales completions against 1,526 in the prior year. All critical metrics grew stronger through the second half of the year, reflected in a marked step-up in construction work in progress.

Management notes that, interest rates aside, volumes are being driven by “a supportive macroeconomic backdrop with strong exchequer surpluses, falling inflation, record and near-full employment, strong consumer spending and a growing population”. Central government has allocated €5bn towards the housing shortfall, although numbers from Ireland’s Housing Commission suggest that supply and demand won’t be coalescing any time soon.

The structural shortfall in housing starts obviously provides commercial opportunities for housebuilders, but it also raises the twin spectre of misallocated capital and excess leverage – central contributory elements to the collapse of the Irish property bubble at the time of the financial crisis.

However, the speculative element that undermined the market in the first decade of the 21st century is no longer to the fore, as demand for housing is primarily being propped up by demographics, including a sharp increase in the rate of inward migration. The share price has grown by 56 per cent over the past year, but the asking price of eight times adjusted consensus earnings suggests that much of the value has been captured relative to peers. Hold

Last IC view: Buy, 95.3p, 7 Sep 2023