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In truth, I don't understand all the negativity here. And the reaction here certainly doesn't reflect the wider analysis in the market, which has broadly
I thought the results showed "steady as she goes" competence by the Board. Yes, profits and the dividend are down, but that's to be expected at this point in the cycle. Cash conserved. Headcount down 10% through a hiring freeze, which controls costs without destroying morale.
We'll have to wait until the end of Feb before we see what PSN and TW do in terms of dividends, but I'd be amazed (and actually distressed) if they don't similarly cut dividends by around 50%.
I think the merger is a shrewd move. Prior to the announcement:
- BDEV had a market capitalisation of £5.5bn against net assets of £5.4bn, of which the land bank is £3bn - so BDEV were trading at par with NAV
- RDW had a market capitalisation of £2bn against net assets of £2.9bn, of which the land bank is £1.6bn - so RDW were trading at a 30% discount to NAV
By proposing a merger with Redrow and making the offer all share the Board is calling the bottom of the market cycle. Rather than taking over a basket case like Crest which will take years to come right; it's proposing to merge with a competitor that it's already worked with, with complimentary market offerings and where co-branded sites have had better sell though than single-brand sites.
The all share nature of the deal preserves capital in the business and we end up with a company with net assets of £8.3bn of which there's £850m of cash and a land bank of £4.6bn. That land bank value is a "bottom of the cycle" valuation - so will improve as the market ticks up.
The immediate downside is that the combined market capitalisation has dropped to Redrow's discount. On the basis that the stock market appeared to trust BDEV's Board over RDW's then I suspect that the discount will get priced out once the merger happens - although still subject to both shareholder votes and Competition and Markets Authority approval. But I'm relaxed about that.
I also realise that I'm in a TINY minority here :)
Good post and analysis. Minority views often prove to be correct.
Agree, interesting analysis & food for thought. I guess everyone has their individual positions and reasons to be invested here. For me it was to diversify from TW. where I am a long-term (2008) holder sitting on significant gains but looking for decent dividend income. I chose BDEV and PSN but my timing was terrible and both have been underwater virtually from the moment I bought them.
Whilst PSN remains a basket case & the yield has dropped dramatically, things were improving for BDEV as both SP and dividend improved. Now the dividend has been slashed and the SP is heading south again. I'm not convinced they will be able to drive the kind of economies of scale that are required to get the yield back to what it was previously, let alone improve it. I appreciate not all investors here are income-seekers, but I suspect the importance of the dividend to investors is much more important than perhaps the Board realised when agreeing this merger.
So, for me personally, I can't take any positives from it I'm afraid. I have yet to decide whether to stick or twist.
krustysmegma - it's well worth reading the analyst presentation deck at https://investors.redrowplc.co.uk/sites/redrow-ir/files/offer-for-redrow/presentation-recommended-combination-of-barratt-developments-and-redrow.pdf
their argument is:
- cost savings through synergies - half of which look to be low hanging fruit based on the expectation that they'll achieve them within a year
- take redrow brand into scotland and onto more sites - this gives a bigger range of home types and price points on each site
the latter point is an interesting one. where they've had both brands on a single site then they believe that planning permission was easier to obtain and both brands sold homes more quickly. i'm presuming that it's because it reduces the ****genisation of the site.
as i say, the deck is worth a read.
it must be said that if you care about immediate capital value and income then it sucks in the short term.
Morning Meconopsis,
For me, I think it’ll be a shrewd move by Bdev, longer term. I consider BWY & RDW to be the better run companies on paper out of the six I follow. Redrow’s figures certainly look better than Bdev’s lately and I can see the logic in the merger myself when things improve. Even at the lower end of 180m pre tax profits for RDW it equates to 54p per share. Having said that I did sell Redrow yesterday, sadly. PSN wise, I’m expecting around £1.10 of pre tax per share, so I guess we shall have to see what their future policy is, maybe 40-60p for the year?I was encouraged by their H2 figures over H1 (+34%) Then there’s the additional tax burden coming in. TW have a slightly different approach of….
Our Ordinary Dividend Policy is to return c. 7.5% of net assets to shareholders annually. As I stated on the LGen board over Christmas, one of the reasons I moved over from Bdev to Wimps, along with their estimated profits for the year (470m, which would give 13.3p per share). Personally, I think TW’s dividend might suffer the least? Looking for a re-entry point here when as and when I see fit
Thanks for the link Meconopsis, as you say well worth a read. TBH though, the more I read it, the more I wonder if it will work at all. Will Barratt, as the senior partner, try to run Redrow as a volume housebuilder, cutting corners wherever possible, and losing sight of the "premium" USP that Redrow aspire to? Will traditional RDW customers be happy to pay a premium price still, knowing that, in effect, they're buying a Barratt box? We'll have to wait & see. It doesn't look like a marriage made in heaven to me though I'm afraid.
I understand your point about brand Krustysmegma.
It probably helps that they've already got experience of working with the three brands together on site. What customers see as branding will count more than corporate ownership. Few will care that it's the same corporate entity. For example, people don't seem to struggle with Skoda / Volkswagen / Audi being one and the same.
I get the analogy, thought of it myself, you could even stretch it as far as Bentley if you wished. As the new Skoda Enyaq Coupe starts at £50k you could even argue that all the marques have moved up a division, and that Skoda is now a premium brand, although it's taken 35 years to get there. I'm just not sure you can assume that people buy houses on the same basis as they buy cars. I guess we'll get some answers if this goes ahead.
This drop nicely allows me to reinvest my dividend.
Great longer term buy/ hold, dividend has been reduced yes and the final dividend may well be reduced also, that's the negatives and I understand why some dividend investors may wish to move on and buy into something with a larger dividend like M&G, however my opinion is that this position is temporary. Dividends will likely rise again next year and when interest rates are cut (later in the summer in my opinion), this will recovery swiftly. On top of that when the world settles down again (wars, etc. - timeline unknown) and the economy starts to move in the correct direction the value of this share will sore. £6 is my minimum target and potentially it will move a lot higher than that. Till then I'll sit and wait and collect the, albeit slightly smaller, dividend.
Good luck all
I’ll reinvest my divi but would only buy more nearer 400p.
Thanks Meconopsis for a really useful counterpoint view.
The NAV argument in particular is strong and, whilst I’d like to see the discount widen a little more before I top up, I am sure that it will in time at least return to par or better. I am happy to buy the assets for a discount and to collect the, albeit reduced, dividends whilst I wait for the discount to turn into a premium.
The minority might not be as tiny as you imagine.