Some thoughts on builders


There seems to be general agreement that there is currently a shortfall of about 1 million homes in the UK with some estimates being quite a bit higher.

Whilst politicians like to talk a lot about the situation it seems very unlikely that it is going to be solved any time soon.  The two solutions being a massive change in the supply side, essentially only achieved by a move to virtually unregulated building, or some form of nationalised building plan. Or a change in the demand side caused most likely by an economic disaster removing the need for housing as people either do not/ cannot afford to move out of their parents home, or of such a nature that mass emigration occurs freeing up the current housing stock.

Given neither of the two options are very likely it seems that housebuilders are likely to be in a reasonably strong market for the next 3 – 5 years and probably beyond.

Now this has been in part reflected in the share price rises that builders have undergone over the last three years, but this does not mean that there is not more to be gained if you pick the right builder.

The reality is that prices usually move incrementally from where they are.  By this I mean that if a share is priced at X today it is likely to move + or – from X tomorrow.  Few people wake up and fundamentally reappraise a price each day.  We have seen this with oil prices in the last year.  Realistically nothing that is moving the oil price at $30 was not known at $80.  But it has taken months to get where it is not because new news has occurred, but because human nature and the fact that we largely start from yesterdays number means that it had to trail though $60, $50, $40 to get to $30.

Using info from Sharepad I have created the following chart, which covers most of my favourite metrics. Particularly those I use when looking at an asset backed business.

Before making any investment I get the accounts of the company and check the information / ratios myself, but I am happy to use the information prepared by Shared or indeed other sources as it helps me screen for the companies I want to look deeper at. I work for a living so have not devoted time to analysing each company separately.  Instead when I do a table like this I look for companies which might have significant additional value.  And this can be found by looking for those companies whose ratios do not fit into the generality of their peers.

At this point it is only wise to put a huge note of caution.  Most usually when a company has significantly different ratios from its peers it does so because it’s in a highly anomalous situation.  Its either the best and everyone knows it, so it is expensive or its a dog and best avoided.  Different and good are not one and the same.

Going through each individually;

Barratt;  To my mind its pretty middle of the pack.  On the presumption that housebuilding as a sector still has legs it should go with the sector.  But there is little to commend it relative to its peers.

Bellway;  To my mind Bellway is interesting.  Its PE*PEG is only 5.9 and the lower this ratio the better.  Its ROCE is over 20 and that is a nice (20) number to beat.  Price to NTAV is sensible to its peers and the Yield* Dividend Cover is better than most.  (For this ratio higher is better).   Full disclosure one of my children has picked Bellway for their portfolio.

Berkley; This looks interesting.  EPV is more than 10% over Mkt Cap.  PE*PEG is only 3.4.  ROCE is 31.8.  The niggles are the price to NTAV is relatively high.  I don’t buy buy much over 3 on this metric.  Though a number of my long term buy and holds have grown to be above this.  Yield*Div Cover is also a smudge low relative to its peers.  That said I intend to do further work on Berkeley as it does look interesting.

Bovis; Given what else is available in the list it does not look particularly special.  Probably better value elsewhere.

Crest Nicholson; Again its not a bad company, just not that exciting on a relative comparison to what else is available.

Galliford Try; Relatively speaking GFRD looks distinctly uninspiring.  A poor PE*PEG comparative.  A poor ROCE comparative and expensive on Price to NTAV.  Which is one reason why you should not rely on a basic comparator but do further work on anything you may actually put your money into.  I have been an on / off investor in GFRD over the last 15 years and it has historically proven to be a good investment.  It is as much an engineering business as a builder and the management team are well regarded by their engineering clients.  So not an investment for me today, in the terms of this exercise.  But not a company I would condemn anyone for investing in.

Inland; For the purposes of this comparison its clear to see that Inland hits the jackpot.  I have therefore done some further work which is covered below.

McCarthy; From the chart above McCarthy is not one to look at further.  However I would point out that McCarthy has only recently come to market. IPO in November 2015 if I recall correctly.  It has been in public hands before and I was a very happy investor before it was taken private.  It sells into the sheltered housing market and its actual results over the next year or so can be expected to significantly change its comparative results.  But without them to review not one for today.

Persimmon; Persimmon is a little bit strange.  Its EPV is less than its Market cap.  Its Price to NTAV is too high, but it has a great Yield*Dividend Cover.  A few years ago Persimmon made a commitment to radically reforming its capital structure and to pay out its excess capital as dividends to shareholders.  This it has been doing and I have been a shareholder throughout.  The comparison above is why I will not be adding to my PSN position but the strong dividend is why I will not be currently selling.

Taylor Wimpey; Like PSN Taylor Wimpey has an EPV lower than Market Cap.  None of its other ratios are very exciting. Though the interest cover suggests that there is some possible capital restructuring options that could be taken by management.  Not a company I would avoid, but not one I feel the need to look further at.

Telford; There are a lot of people who like Telford Homes a lot.  They are very London focussed and if London property continues to boom they should do well.  That said I am personally not that excited by the ratios.

Some further thoughts on Inland.

Inland Homes was set up by Stephen Wicks.  He had previously set up and run Country & Metropolitan plc which listed in 1999 at a Market Cap of circa £7million and was sold in 2005 for £72 million.

He then set up Inland Homes with a core team from Country & Metropolitan.  They were however not intended to be a builder.  When initially listed the thesis was very much that the real earnings of C&M had come from getting planning permission for land and not from building.  Inland was therefore not going to be a builder but a land developer.  Once planning consent had been won on a site it would then be sold to a builder for the development.

IMHO this met with only limited success.  It turned out that the larger builders did not need Inland as much as Inland needed the larger builders.  They had their own teams to find and consent land and their need for additional sites was set either by internal replenishment targets or for a number of years severally curtailed by the financial crisis.

This encouraged – forced Inland to extend its range of operations and to begin building in its own right.

Inland remains a minnow in this arena.  As a consequence there is a real risk that revenue will be volatile.  The larger players are bringing on hundreds of developments, Inland has a couple of dozen and a couple of key revenue generators within that.  One major problem on a key site and the numbers will be impacted,

The company is small so there is a limited base of professional investors.  (Only Henderson Global Investors has a holding over 3%). This means that there is limited trading in the shares and they can be very volatile on limited news.  The spread can also widen and close as the broker sees fit, rather than to reflect any underlying factor.

That said business is currently going well and Inland has proven themselves capable of finding, consenting, developing and selling sites.

Compared to its peers Inland is lowly rated against the real results that it is delivering.  The problem for Inland is getting the attention of the larger investors who could help it become rated more closely to its peers.  Its market cap is currently just too small for many funds and there is no specific catalyst that would cause it to rerate any time soon.  However given the delivery is currently real and management have in the past delivered shareholder value there does seem to be a limited downside with decent upside potential.  I also note that management have significant positions in the business and they are not getting any younger so have an interest in delivering a catalyst event.  I also do believe that over time the rating should close in part as Inland continues to validate the building and sales side of the operation.

I have therefore initiated a position in Inland with a DCF valuation £215m – £255m. With a possible break to the upside.

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