Why Redrow is best housebuilder since Brexit vote

A long-awaited government housing white paper, published yesterday, offered ideas to speed up development by the big housebuilders, and open up the market to smaller ones. It generated a mixed response, but sector share prices responded well on a day that Bellway's results also triggered upgrades. Now, Redrow's forecasts look conservative after impressive half-year results.

Redrow is doing its bit to tackle the country's housing crisis. It increased legal completions by 13% in the final six months of 2016 to 2,459, and at an average selling price of £344,000, 12% more than a year ago.

While higher prices stretch potential buyers financially, some of that increase was down to location, with 47% of turnover now generated in the South East of England where property tends to be more pricey. Last year it was just 38%.

And more potential homeowners are, at least, taking advantage of the government's Help to Buy scheme, up from 746 to 865 of private reservations in the six months.

Brisk business was great for Redrow's top line, with first-half revenue surging 23% to a record £739 million. That shift south alongside natural house price inflation beefed up operating margin by 130 basis points to 19.5%, driving pre-tax profit up 35% to £140 million and earnings per share (EPS) to 31p.

And there's very good reason for investors to remain optimistic. "We entered the second half of the current year with a record order book, with many of our sites sold five to six months in advance," said the firm, and both customer traffic and sales "remain robust".

Given that Redrow's sales rate of 0.73 so far in 2017 is also in line with last year, chairman Steve Morgan has "every confidence this will be another year of significant progress".

Factor in all this, plus lower net debt and the recent purchase East Midlands builder Radleigh Homes from former Derby County owner Peter Gadsby, and Redrow is more bullish on medium-term prospects.

It now tips turnover to hit £1.9 billion in 2019, up from £1.38 billion last year, and increase operating margin to 19.5% and EPS to 77p, from 18.9% and 55.4p in 2016, respectively.

But even management's new target "looks cautious," according to Numis Securities analyst Chris Millington. If market conditions remain favourable it "could be comfortably beat", he says, arguing that the shares appear "too cheap relative to the market".

He's upgraded pre-tax profit forecasts by 14% both for this year and next to £297 million and £325 million. EPS is expected to be 66.5p then 73.4p.

Up over 4% Wednesday to 471p, Redrow shares are now higher than at any time since the dying days of 2015. They're also the best-performing housebuilder since the Brexit vote, up 15% in the past seven months.

However, they still trade on just seven times forward earnings, dropping to an uber-pessimistic 6.4 for the year to June 2018. The dividend yield isn't as impressive as Taylor Wimpey or Barratt developments, true, but a 50% hike to 6p for the half-year gives a prospective yield of around 4%.

Millington thinks the shares are worth at least 500p.

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.