Interactive Investor

Business booming at Redrow

28th June 2016 12:39

Harriet Mann from interactive investor

The UK's Brexit vote has swung a wrecking ball across the housebuilders as investors fearing a housing crash pulled their money out of risky stocks. A warning that house prices could crash 18% in the aftermath does not paint a rosy picture for the sector, but Redrow has rebounded sharply from Friday's five-year low. In fact, business is booming and the company has beaten 2016 profit forecasts after a big year for reservations and disposals.

Unaffected by pre-referendum jitters, newly launched sites enjoyed long queues and strong reservations last weekend. And Brexit does not alter that fact that the industry is suffering from decades of undersupply against long-term increasing demand.

"Although it is too early to tell whether Brexit will have any effect on future sales, initial feedback is that sites remain busy," said Redrow Tuesday, which now predicts pre-tax profit for the year to June will exceed the top end of analysts' estimates, currently £240 million. We'll get confirmation on 6 September.

Numis Securities has upgraded earnings estimates by over 7%, although Brexit uncertainty holds back any upward revision to 2017 numbers. It raises profit forecasts from £230 million to £247 million, giving earnings per share of 54.2p, up from 50.5p previously.

Turnover should jump 20% this year to a record £1.38 billion, with the number of completed homes climbing 17% to 4,716. Higher turnover and lower costs have reduced net debt by double-digits to £138 million.

"Whilst the outlook has clearly been made more uncertain by the UK's decision to leave the EU, we still think that the fundamentals of the housing market are positive and forecasts of significant price falls feel exaggerated," says Numis analyst Chris Millington. "In our view the current sell off in the sector offers a very good buying opportunity for investors willing to take a medium term view."

After staging a breakout from its bearish trading channel mid-May, Redrow briefly collapsed by three-quarter. But after a quickfire recovery the shares are back in that bearish trading channel. The shares are now trading on just 6 times forward earnings compared to the 9 times price/earnings (PE) multiple seen at September's highs.

Great full-year results in September or further reassurances of life in a post-Brexit world could be enough to trigger another breakout. Millington is confident, valuing the shares at 460p, implying 40% upside.

Ahead of September's full-year results, investors now know an improving mortgage market underpinned a strong new homes market last year with private reservations jumping 46% to a record £1.56 billion, which pushed the private order book up by half to £807 million by the end of June. The sales rate stayed flat at 0.68 a week, highlighting the positive impact house price inflation is having on earnings - the average private home was sold for 10% more than last year at £328,500.

Now the Commercial Street and Amberley Waterfront developments are completed in Central London, focus can turn to getting the remaining plots in its Holland Park Avenue and Connaught Place ready. All the London developments have either met or beaten expectations when sold, with the Colindale order book reaching £116 million.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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