Galliford Try: 40% upside and 8.5% yield

Lagging behind its housebuilding peers in the post-referendum recovery, Galliford Try has finally broken ahead of the pack. Its results were as expected, but proof that it's generating better returns and confirmation that Brexit did not dampen summer sentiment has supported a move past a key technical level. According to City forecasts, there's 40% upside here and a prospective yield of 8.5%.

Revenue rose 6% to £2.5 billion in the year to 30 June, or by 10% to £2.7 billion including joint ventures. Asset disposals and better efficiency at Linden Homes and Partnerships, the regeneration business working with local authorities, boosted pre-tax profit by 18% to a record £135 million, giving earnings per share (EPS) of 132.5p. Return on net assets is two percentage points higher at 25.3%.

Net debt nearly halved to £8.7 million at the end of the year, with average debt of £204 million over the period. And income seekers have been rewarded with a 21% surge in the full-year dividend to 82p, 1.6 times covered by earnings - a level that Galliford will maintain into 2017.

In a bid to more-than double 2013's pre-tax profit by 2018, Galliford unveiled growth targets across its three businesses - Linden Homes, Partnerships & Regeneration, and Construction - in its February 2014 strategy statement.

Targeting an operating margin of 18% at Linden Homes, the business hopes to drive revenue 50% higher than in 2013. Its partnership team eyes a 200% increase in contracting revenue and pencils in mixed tenure turnover of at least £60 million, while construction wants 50% growth.

Decades of housing undersupply and government stimulus packages like Help to Buy have created an optimum trading backdrop for Linden Homes, we're told, with a double-digit jump in completions there underpinning an 8% increase in revenue to £841 million. "Customer interest in Linden Homes remains solid," Galliford says.

Efficiencies boosted margins from 16% to 17.5% - within a whisker of its 2018 target - and its log book of sales reserved, contracted or completed has jumped to £510 million from £427 million. With a land bank of 11,700 plots, 14,500 across the group, Galliford has secured 100% of the land for 2017 and 85% of 2018's requirement.

While the construction business is yet to make headway, Galliford's Partnerships & Regeneration mixed-tenure revenue reached £67 million and margin rose to 3.9%. Contracting sales slipped 14%, held back by rent reforms, although its order book is chunkier at £865 million.

With trading robust since the referendum, broker Peel Hunt leaves pre-tax profit forecasts for the next two years unchanged, forecasting £162 million in 2017 and £188 million in 2018, giving 156.2p and 181.8p EPS respectively.

Galliford's share price has now broken above the 38% Fibonacci retracement of the 60% collapse from the summer 2015 high of 1,822p. Climbing another 4% to 1,180p Wednesday, the shares are trading on an undemanding 7.6 times 2017 earnings, dropping to 6.5 times 2018 forecasts.

Although Peel Hunt has trimmed its dividend forecasts and downgraded its target price to reflect restricted dividend guidance, Galliford still yields over 8%. However, a 1,675p target price reflects 42% upside for those investors still wanting exposure to the housing market.

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.