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Redrow takes aim at government

Cut through grumbles with the operating environment, and strong returns look assured
September 15, 2021
  • Order book hits a record
  • Housebuilder presses for SDT cut

“We’re in a great position with a great product to exactly match the market,” says Redrow (RDW) chief executive Matthew Pratt. Recent form bears this out. Despite a surge in completions in the year to June, the housebuilder finished the period with a record order book of £1.43bn, a fifth up on the pre-pandemic high.

The outlook is bright, too, albeit steady. By 2024, management expects revenues to exceed £2.2bn, operating margins to return to 19.5 per cent, and the return on capital employed (ROCE) to exceed 22 per cent. Assuming earnings hit consensus forecasts of 84.5p, 89p and 90.2p per share over the next three years, Redrow will have generated almost two-fifths of its market capitalisation in net profit.

But in a strange parallel with the stock market’s evident disquiet, management doesn’t seem happy with the operating environment. The government comes in for most criticism.

First up is housing minister Robert Jenrick’s ‘Building Beautiful Places’ plan, whose onus on higher-density development fails to account for pandemic-driven lifestyle changes. Apparently, 77 per cent of people want to live in the kind of two-storey detached home you’ll find in a brochure for Redrow’s Heritage Collection Homes. Survey source: Redrow.

Then there is the stamp duty tax (SDT), the full reintroduction of which Redrow sees as a looming constraint on transactions. The group now wants a permanent cut in the tariff, arguing the state’s take would increase and that the break has been an “unquestionable success”. A recent study by the Resolution Foundation, which found house prices rose the most in areas where savings from the tax were “negligible or non-existent”, suggests otherwise.

Next is wage inflation, the responsibility for which lies in part with a pro-Brexit administration. When labour costs picked up in the past, “you dealt with the problem by falling back on Europe”, admits Pratt. How much higher these costs could rise is a key uncertainty. So is interacting with local authorities. “Trying to do business in a planning system that isn’t ideal is a problem,” adds the chief executive.

At least the unwinding of Help to Buy has been shrugged off. Just 13 per cent of Redrow’s sales were reliant on the scheme in the second half, down from 50 per cent a year earlier.

We agree with analysts at Jefferies that 2024 guidance “doesn't suggest revolution”, and there are unanswered questions on the medium-term use of cash, after ordinary dividends are factored in. But the current valuation asks little of a company serving a structurally undersupplied market. Buy.

Last IC View: Buy, 663p, 27 May 2021

REDROW (RDW)   
ORD PRICE:695pMARKET VALUE:£2.4bn
TOUCH:695-697p12-MONTH HIGH:721pLOW: 352p
DIVIDEND YIELD:3.5%PE RATIO:9
NET ASSET VALUE:532pNET CASH:£160m
Year to 30 JunTurnover (£bn)   Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20171.6631573.717.9
20181.9238085.328.0
20192.1140692.330.5
20201.3414032.9nil
20211.9431473.724.5
% change+45+124+124-
Ex-div:23 Sep   
Payment:17 Nov