Redrow (RDW) plans to scale-back from London and focus on its higher-returning regional sites as homebuyers search increasingly for greater indoor and outdoor space in the wake of the pandemic.
However, provisions for retreating from the capital - to just Colindale Gardens - will result in profits for the year to the end of June being substantially below 2019. Peel Hunt forecasts that the cost will be around £30m and analysts have cut forecasts for 2020 pre-tax profits by more than half and by 46 per cent for 2021.
In the five weeks since reopening sales offices, the net sales rate per outlet per week was 0.56, down only slightly on 0.59 the same time last year, reflecting strong pent-up demand, especially from buyers using the help-to-buy scheme. Executive chairman John Tutte urged the government to extend the scheme in its current form beyond March next year, when regional price caps are set to be introduced, to help boost the housing market’s recovery.
The housebuilder is back at work on almost all of its sales and construction sites. But their closure during lockdown, in a year where completions were intended to be second-half weighed, also meant that volumes were down more than a third and turnover limited to £1.34bn, down from £2.11bn in 2019.
Lockdown also meant last year’s net cash balance of £124m has switched to a net debt position of £126m by the end of June. However, Mr Tutte said efforts to protect cashflow meant it had decided to return all payments received under the government’s Job Retention Scheme and was unlikely to draw on the £300m secured under the Covid Corporate Financing Facility.
Redrow has a solid track record of improving cash generation, in part due to tight control on costs and pre-pandemic efforts to scale back site openings, which could stand it in good stead for tougher housing market conditions. Free cashflow has improved for the past five consecutive years, with the group generating a free cashflow yield of 14.8 per cent at June last year.
Housebuilders have the ability to be highly cash generative but the debate has been whether to use that cash to fund growth or pay out large dividends, said Peel Hunt deputy head of research Clyde Lewis. Redrow has opted for the former in recent years.
“They have probably been a bit more balanced over the past two, three, four years than others that have gone harder on the dividend and less at growth,” said Mr Lewis.
What’s more, while other housebuilders, such as Persimmon (PSN), have managed to generate higher returns, said Mr Lewis, they have also been struck by build quality issues, something Redrow has avoided.