Hardman and Co Research Analyst Tony Williams caught up with DirectorsTalk for an exclusive interview to discuss his research note on the housebuilding sector.
Q1: 2017 was a banner year for the house building industry with a 40% rise in share prices, reading your latest quarterly, it’s not much fun this year, is it?
A1: You’re absolutely right, it’s not so much fun, share prices are down on average by about 8% but I prefer to look at it weighted by market capitalisation to see is it the big guy or the small guy going up or down. If you take in scale of company, the fall is 13% year to date which effectively is the first half of the year.
Q2: So, I assume then you mean the larger stocks have fallen further than the smaller ones?
A2: They have indeed. If you look at the first half of the year only four companies, in the sector there’s 17 listed companies, only four are higher in that at the end of the first half than at the beginning of the year, they are Springfield, Inland Homes, Abbey and Gleeson. Now the largest of these, Gleeson, which is around about the £400 million mark, but Springfield is the tiny one and that’s at £125 million so these smaller stocks has certainly outperformed their bigger rivals and in the blue zone, if you will.
Q3: So, why is this happening?
A3: When you’re at Barratt or Persimmon, you really have national coverage, you’re in every nook and cranny of the United Kingdom. If the market slows nationally, you slow with it, if selling prices go down, that’s going to affect if costs go up and what we’re seeing is a squeeze on margins here and they’re because of that reason.
In fact, we’ve seen the same when it’s exposure to London, which has fallen more than the national picture and we’ve had three profit warnings, one from Crest Nicholson, one from McCarthy and Stone and one from Berkeley, albeit the Berkeley one. To be fair, they were talking about them in the autumn and for them, it’s very much a graduated change of pace pro tem, but the others were genuine old-fashioned puzzle warnings albeit they didn’t call them that.
Turning to the stocks that are up, the four companies which are higher, Springfield Property PLC (LON:SPR) is a Scottish housebuilder and Scotland is doing relatively better than the rest of the UK, Springfield even made a small acquisition this year; they’ve only been listed since October and they played a blinder, they’re 19%/20% and the company is doing extremely well.
If you look at Inland, Inland Homes PLC (LON:INL) is a different animal, they have three or four strings to its bow. It buys and sells land; it takes raw land, take it through planning and sells them oven-ready to the housebuilders which they like because it means less capital employed for less time. Inland also builds houses in its own right, deals in commercial property and also brings land to a local authority or to a housing association, sells the land and then gets the contract to build the houses.
MJ Gleeson PLC (LON:GLE), very similar to Inland in a way, albeit that it sells more houses than land and it’s average selling price in the first half of the year was 124,400 which means that they are very much at the rock bottom end of the market but there’s clearly demand there, and they’ve fulfilled that but it’s a different animal to Inland which is the in south-east and would be £300,000-£400,000 a unit.
Finally, Abbey plc (LON:ABBY), they are an Irish listed company as well as listed in the London Stock Exchange. They have a business in the UK and in Ireland and clearly, Ireland after the turmoil that the market went through is going gangbuster so they’re benefiting from having an interest in that market.
Q4: How to do see the rest of the year going?
A4: I really think that it’s going to be difficult, for the first time, for many many years, I’m looking back now to the global financial crisis, and look at the consensus earnings forecasts and the first time in 5/6/7 years, the consensus is that it’s a flat growth in 2018 so no growth in earnings this year in the current year. It could well slip negative, you’ll see revisions come through and I am absolutely cast iron certain that there will be more profit warnings and if there are more profit warnings, share prices will fall. So, that’s why I think it’s going to be a tough run in to the second half.
Q5: Now, you have chosen a World Cup theme for your latest report, who do you think is going to win the World Cup?
A5: I’ve always, right from the start before England had presently surprised us, my guess was for a Belgium vs England final and I think England will prevail. I think we have a fantastic captain in Harry Kane, so fingers crossed we do the business against Sweden and then go on to make the final a winner.
Indeed, and credit to Jordan Pickford too for that amazing save!
He was amazing, yes, absolutely, and Gareth Southgate’s quietly done well. Also, I don’t know if you’ve read the sale of waistcoats has gone exponential since he wore them on the touchline.
