LAND AND NEW HOMES
However, asset value isn’t as safe a
haven as it might seem. Asset values have collapsed since 2006-7 as house builders took write-offs against their overvalued land banks. For instance, at its 2007 year end, Barratt had a net asset value of 763p a share. Now, it’s 208p, though at least the company has managed to reduce its gearing by paying off some of its debt. While this year’s performance seems to have showed that house builders can still perform in a stagnant housing market, if we hit a true double-dip we could see more write-offs being taken. So Robin Hardy says investors shouldn’t
fall for the meretricious attractions of a low price to book value, they should keep their eye on the traditional valuation measure, the Price to Earnings Ratio (PER). And on this metric, most of the house builders look expensive. Redrow, for instance, is trading at up to 50 times the earnings analysts are predicting or the year to June 2011, substantially more expensive than many high growth technology stocks. Barratt trades on 30 years’ earnings, Bovis on 37, and even Bellway at 15, so if earnings
stayed at this year’s level, you’d have to hold the stocks that long just to break even. One reason for the high valuations, of
course, is the cyclicality of house builders’ earnings. Just as earnings were savaged by write-offs on the way down, on the way up companies will see the benefit of a lower land bank valuation come through in expanded margins, and profits should rise quickly. Taylor Wimpey is a good example of this. It’s trading at 43 times this year’s expected earnings, which looks high. However, analysts are expecting that to fall to just eleven times the next year’s earnings, as sales rebound and margins improve. Even so, some of the valuations look
stretched. To put Redrow back on a more normal valuation, profits would have to grow six fold. Otherwise, the share price will have to come back.
Canny acquisitions give the company
the ability to increase its output, and potentially its profits.’
The danger of The double dip There is another way to look at these valuations, though. Historically, house builders always trade on a low PER at the top of the cycle, when they’re doing well, and by the time the trough has been reached, they’re trading on absurdly high valuations. In 2005, when house builders were reporting excellent results and net asset values and earnings were growing fast, the average PER was just 5.4 times. 1989, the top of the previous cycle, saw similar valuations. Of course companies weren’t as cheap as
they looked. Once the cycle turned, falling land bank values, rising debt service costs, and falling house prices led to a margin squeeze that wiped out their profits. With the benefit of hindsight we can see the real PER was much higher. At the bottom of the cycle, on the other
Trendy new homes by Galliford Try. 20 JANUARY 2011 PROPERTYdrum
hand, valuations always look extremely high, because no one has the confidence to forecast a dramatic recovery. So you might say that the stock market is currently forecasting a recovery in the housing market, if not now, at least in the medium term. The more bullish analysts point out that whatever the gloom coming from RICS and the Halifax index, the discount to asset values, and the fact that many shares in the sector have fallen as much as 20 per cent in the past few months, already provide for the possibility of a double dip. Indeed, some house builders’ shares are now trading at 12 month lows, now the enthusiasm we saw at the start of the year has been tempered by experience. But Robin Hardy points out that the
‘Barratt had chosen to optimise selling prices, rather than push as much
volume as possible, as part of that strategy, the company has been selling more houses, rather than flats.’MarK Clare barraTT
fundamentals facing the sector are the worst they’ve been for a while. Public sector redundancies and higher unemployment will have an impact on public confidence levels, which will impact the market. Higher unemployment may also cause banks and building societies to be even less inclined to lend to the mortgage market. A number of analysts have already
reduced all their forecasts in the sector to reflect the dangers of a double dip. And after a less than exciting autumn, traditionally the time that house builders bump up their reservations before the winter brings the selling season to a close, news from within the industry is chilling. No one seems to be closing deals. Lots of prospective purchasers are looking, but very few of them are putting down a deposit. So maybe the stock market has got it wrong, and we are in the middle of what could be, for some house builders, a very cold winter indeed.
Add your own opinions to the debate:
www.propertydrum.com/articles/buildersjan
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68