Research Analyst Tony Williams of Hardman and Co caught up with DirectorsTalk in this exclusive interview to discuss the housebuilders market and the companies to keep an eye out for.
Q1: We’re talking about the housing market today with the budget due out on Wednesday. So what’s happened to the housebuilders market since the general election?
A1: Share prices are up in double digits, the first day after the general election, they were up 7% and they’ve doubled that since then. There was a lot of relief when a majority government was elected and the Conservative government which is considered a relatively more user-friendly for the private housebuilders and particularly the mansion tax as a Labour idea disappeared. So there was palpable relief and that really has continued with the sector breaking ground in Q2 on 17 new times and on breaking ground, I mean that the value of the ten listed housebuilders in the UK has gone to new levels and it reached its peak on 22nd June and that was at £33.8 billion.
Q2: Do you expect it to be a housing-friendly budget on Wednesday?
A2: Yes, there’s a lot of speculation particularly in the trade press about what George Osborne may actually do. It’s hard to say what will happen but certainly the feeling is that there’ll be more action on help-to-buy, the way that’s organised will change, maybe slightly but it will change, it’s already been extended now until 2020. There’s also a feeling, this is a bit of an outsider, that there may be some movement on the planning system. What we have and all I hear from every statement that comes out from the industry is a criticism, if you will, of the availability of land and where the land is available it takes an awful long time to take through the planning process. So the outsider is that they’ll be some help on planning and certainly the industry hopes there will be.
Q3: Do you think that this is going to be different this time?
A3: I think this is the $64 million question in a way. We’ve been here before, we were here in ’07 when the sector was similarly valued, and it’s now actually broken new ground above that. I think a number of things have changed, I think that the industry is better managed than it ever has been and I’ve covered this industry a very long time, if you look at the attention now to strategy and planning and it’s much better than it ever has been. You’re also getting the situation where people aren’t running high levels of debt so most people aren’t pushing volumes dramatically and when they are, they’re using their cash very efficiently so you really haven’t got any sizable debt across the industry. What happened in ’07, the thing that really hit people like Barrett and Taylor Wimpey in particular, was the level of debt and servicing that debt through a downturn. So I think the key things that have changed is the sector is significantly better managed, a lot more attention to detail, particularly equity ratios and also the level of debt is negligible and so as and when the downturn comes and it will come but I don’t see it soon, then the industry will be in a better position to weather that downturn.
Q4: Do you think this is the top or can the sector go even higher?
A4: I think if you look at the prospective price earnings ratio, they’re around about the 10-11 times, now anything else out there is in middle teens so there still at a discount to the going rate for other equities and I think they’ve got earnings momentum, we’ve got something like 28% earnings growth this year, 14% next year. If you can buy that on 10 or 11 times, I don’t think it’s too demanding. I think that the head of steam up here in terms of volumes, price and margins, which I think will continue at least out until 17, I think with any reasonable parameters that you can look out 15, 16 or 17, on that basis I believe profits and earnings will be higher and therefore I think the share prices can go significantly higher than where they are now.
Q5: Talking about share prices, what companies will you be keeping an eye on?
A5: We all have our pets in the industry. The ones that I like, the ones that I think stick to their knitting if you will, are Redrow Plc (LON:RDW) which is run by Steve Morgan, still the largest shareholder in that business, they do a super product and they’re expanding in London and the South East which is a new area for them relatively, they are just a very well managed focused business. The other is Bellway Plc (LON:BWY) who are like the ‘Cinderella’ of the housebuilding sector. It’s based in Newcastle and has been there 40-50 years. Year in, year out it produces good results and I think every year it has paid a dividend and they, again, have a real head of steam up in teams of earnings and growth. So if I had to focus on two stocks with Bellway being the less glamorous, they are the two I would keep an eye on.
