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A recent report by Savills illustrates the growth in the Build to Rent market in 2023, “BtR Houses, otherwise known as Single Family Housing, saw £1.9 billion worth of investment, up significantly from £360 million in 2022. This represented 42% of total BtR investment, shattering the previous record of 8% in 2022.”
This statistic represents a significant movement to new development, rather than acquiring existing housing stock for the rental market.
The latest ONS construction report for Jan 2024 shows, latest 3 months on year earlier, public new housing up 5% versus private new housing down -20%. (Currently, public only represents 15% of all new housing)
Perhaps the Vistry CEO is correct in saying the time is right for the partnerships model.
I’ve been following Vistry’s progress towards the partnership model for a few years. I was invested in Galiford when Vistry (formally Bovis) acquired their partnership subsidiary. While I’ve been attracted to the partnership model as key to getting more homes built, addressing the societal need, from an investment perspective I’ve struggled to understand the barriers to the traditional builders moving to the model and negating any Vistry advantage.
I watched the recent results presentation by Persimmon.
I was surprised to see that partnerships accounted for 23% of Persimmon’s sales in 2023, up from 18% in 2022, but partnership volumes were still down 17%. The CEO acknowledged the need and likely trend towards an increase in the supply of affordable housing, particularly if Labour wins the next election. But I interpreted his comment as favouring the status quo with the return of a coalition if not Conservative government. Perhaps I over interpret the comments, but it encouraged me to believe that Vistry will get a clear head start in the partnerships sector, and that creates a moat over the traditional builders, albeit for a few years.
I see this as important because I expect the future housing market to be quite different from the market that has operated for the last 30 plus years. I think a potential reversal is illustrated in the house price to earnings ratio, which peaked in 1989 (5x), 2007 (6.3x) and most recently in 2020 (7.0x). Each push higher has its own stimulus and, in my view, the latest was due to:
Planning restrictions, supported by the emergence of the Nimby, which favoured the large builders over the small and medium builders which struggled after the 2008 financial crisis.
Low interest rates, which made higher house prices affordable to buyers.
A diminished desire for flats, following the cladding and lease issues, and Covid lockdown.
(and I’ll add, with lower conviction) A more constrained construction labour force following Brexit.
Today, because of the cost of housing, the marginal first time buyer remains in the private rental sector, and the marginal private sector renter has fallen back to local authorities for social housing. Key is that local authorities have a statutory requirement to support the lower tier, and it then becomes a government problem, which can no longer be ignored.
Assuming Labour form the next government, I’m doubtful it will achieve a substantial increase in the number of houses built, particularly given a continuing constraint on construction labour, but I’ve no doubt that tax funds will be directed towards the affordable housing market. The current CMA investigation should provide evidence of the impact of planning restrictions and Labour might implement a policy solution, which I doubt strengthens the hand of the dominant large private house builders over the affordable market or the small and medium sized builders.
Amundsen Spirit has been sitting a few miles west of Kraken for several days. Offload interval now 29 days and counting.
Eco West Coast, which I think is the onward transfer tanker, has been sitting in Scapa Flow since the 11th.
A few days delay in an offload isn't a biggie, but something upset plans just before or during the offload. AIS is poor but I thought I saw a short hook-up on the 9th. If so, it was abandoned early.
Meconopsis, now I understand.
The note was generated by A.I., which was instructed to include moat status.
A human would not have included the phrase, “the no-moat homebuilder”. Given the definition of moat, a redundant phase in the context of home builders. Only needs a minor modification to the instruction set. I’m guessing next year’s note on Persimmon will not mention moat status.
In 1978 I was writing machine code to program Motorola 6802 microprocessors. We’ve come a long way!
Meconopsis, thanks for clarifying their use of the term.
I don't have access to the site. Can I assume that no home builder has a moat? I wondered if Vistry's partnership model gave them a moat, but minimum 10 years (narrow moat) sounds a stretch.
The Morningstar note describes Persimmon as a “no-moat homebuilder”.
If Persimmon is a no-moat homebuilder, is the same true for Bellway, Barratt Developments and Taylor Wimpy, i.e. all the traditional house builders?
If so, is there a homebuilder that does have a moat?
So good that I wonder if I’m missing something, which is why I’m posting my numbers for someone to highlight my error.
I’ve been concerned about the prospect of this third platform in the US because of the high PEs that are being attributed to US aggregate companies. As a result, I anticipated a dilutive placing for any substantial sized acquisition. Today’s news comes as a relief - a modest price for a substantive US acquisition paid with debt.
My numbers:
BMC EBITDA (TTM Oct 2023) $35.5m (£28m) – probably higher year end given the run rate.
Combined group EBITDA £28m + £242m = £270. BMC represents 10.4%.
Enterprise value = BREE mkt Cap (pre-acq) + Net debt + BMC acq = £1,340m + £170m £240m= £1,750m. BMC acq cost represents 13.7% Enterprise Value.
That’s a modest premium (EV/EBITDA) for a 6% growth market, with, judging from BMC’s history of acquisitions, a good pipeline of bolt-ons. Bolt-ons that Breedon can afford from ongoing FCF and debt - a slide in the appendix shows good liquidity and a clear debt maturity profile out to 2026.
Still to digest the 2023 numbers, but at first sight it looks a robust performance with higher FCF than 2022, with same again c.£100m net CapEx. Final dividend higher than I expected too.
Stevo12, my EPL generated in 2024, payable in 2025.
Rather than work a number afresh I worked from the expected $150m on 2023 figures.
Pre EPL = 150/35% = $430m
Anticipating slightly higher oil prices in 2024 I went with same again EBITDA.
Same again Kraken lease and BP Magnus deductions.
I assigned $30m extra to UK CapEx, worth an additional allowance of 30*1.29 = $39m
(430-39) *35% = $137m.
As a mental note, I registered it as same again.
Stevo12, I've a few differences on cash interest, lease costs, EPL and Magnus BP share, which are minor, some up, some down, but I use a very different model, using crude oil sales as my top line number, add gas profit and subtract everything else.
Putting your numbers into my model returns $16m FCF for 2024. However, I'm awaiting some detail from the final results, largely in relation to gas fees, and I currently assume no interest on cash, which are likely to increase FCF by $10m-$20m, on my 2023 and 2024 models.
I'm assuming no M&A, incl. cash for Bressay farm-in, or changes/unwinding of working capital.
As to 2025, I've only looked at the EPL charge based on this year's profit, which is same again EPL. I'm a long way off considering volumes or prices for 2025.
Luxs, Willam123, thanks for your replies.
It looks like the segment I’m ignoring is the ‘sales direct from manufacturers’.
I now see this as a segment that isn’t available to the Likewise business model; which is distribution to traditional retail.
In Headlam’s update they described a spectrum of market opportunity running from traditional retail through, tradespeople & fitters, contractors to the larger sector of multiple retailers and larger housebuilders.
lux’s, I believe you operate in the retail sector, and I remember you expressing frustration with Headlam’s move into trade counters. Therefore, would I be right in thinking the trade counters are competing against you for the tradespeople & fitters and contractors segments?
Also, would I be right in thinking that very few homeowners would use trade counters and attempt to fit the carpet themselves?
Presumably, Likewise has no plans to go the trade counter route?
Likewise has a medium-term target of £200m revenue. Given the current proportion of own-brand (68%) that represents £135m of own-brand revenue. I guess looking at it this way that level of supply is possible from non-branded manufacturers.
Incidentally, at the growth rate, YTD, that’s a 3-4 year timescale for £200m.
Thanks luxs, I wasn't clear in my query.
If you aim to be a larger distributor of carpets within the UK market, can you do that by largely focusing on own brand?
I'd guess many distributors has an own brand product, presumably targeting the discount end of the market, but I'd have thought that the majority of carpet sales are of the traditional manufacture brands e.g. Axminster - that's the limit of my knowledge on such brands. Or are the majority of UK sales own brands from the likes of Carpetright or Tapi?
Can anyone shed any light on the relevance of branded business versus non-branded business within Likewise?
Good news on Pierce.
Unfortunately, last month SQZ reported a problem on Erskine, "Erskine has been shut in since 25th January 2024 due to an issue with a compressor. It is expected to restart during March." Erskine is a substantial producer for Ithaca - over 2 months production was lost from Erskine last year.
I've heard comments from Ithaca on Captain production that seem to vary with the wind - good, cautious then good again.
In a couple of weeks we'll have 2024 production forecast which should take in all the various anomalies. I suspect we'll see a relatively wide forecast taking in what I think will be unknows on Captain - when will the impact of polymer kick in and to what degree.
The detail on CapEx should be interesting.
This isn’t one of those companies that I delve too deeply into. Mainly, because when I try, I see too many moving parts to have confidence in my numbers. Rather, I trust Senior’s management to be capable of running the business effectively; a business operating in growth markets.
I was encouraged by the presentation and Q&A.
It reminded me that the build rates of Boeing and Airbus are still well below the rates of 2019, and will not return to those rates until 2025/6, with growth continuing beyond.
The business is well diversified, with 6% of total revenues in the troubled 737Max program.
In answer to a question on the likely timeline to a ROC target of 13.5%, the CFO didn’t hesitate to reiterate the previous expectation and gave end 2025 as a target.
FCF largely went to the dividend with costs relating to the acquisition of Spencer largely responsible for the increase in debt.
As we move through 2025/6, with ROC greater than the 13.5% targeted there’ll be a significant step up in profitability. A normalization of the growth rate and improvements in the supply chain will reduce WIP from last year’s £28m to a more normal c.£5m. In the absence of acquisitions, debt and associated interest costs will fall. All these components should contribute to FCF levels at or better than the c.£60 we saw in 2019.
Barring any jarring adverse company related event, which I see as unlikely given the product diversification, this is still a stock I’m comfortable to hold into the 2025/6 timeframe, when I’ll reassess my position.
There's $795m of gross debt.
The debt has covenants in place to restrict distributions ahead of the company's ability to repay debt. Is the threshold as simple as the debt/EBITDA ratio that is often referenced?
There'll be an update on shareholder return plans later this month.
Good find Nitro.
This was harbour’s position last August:
‘In Mexico, the unit development plan (UDP) for the Zama oil field (Harbour 12 per cent non-operated interest) was finalised and approved by the regulator in June and the partners have formed an Integrated Project Team to manage the delivery of the development. Preparations are underway to commence FEED and refresh cost estimates ahead of a potential final investment decision in 2024. This would result in approximately 75 mmboe of our 2C resources moving into 2P reserves, replacing over a year’s worth of Harbour’s current production.’
As an investor in Ithaca and an observer of the Rosebank development, which issued an FID on 27th Sept 2023, I believe provisional contracts are awarded during the FEED process and when the gun is fired on the FID a high level of CapEx is quickly incurred. On a 4-year build out project $0.5bn of the total $3.8bn Rosebank budget was spent in the 9 weeks following the FID.
This news update which says a an anticipated $1.24bn spend this year will now be $70m suggests to me that there will not be an FID on Zama in 2024, meaning a $9m net spend in 2024 rather than c.$150m.
Considering the proposed WD merger and associated developments underway the delay might come as a relief to the HBR board. An extra $140m in the coffers for this year’s budget. With the prospective spend on Zama in 2025 and beyond a relatively small part of an overall CapEx budget for the merged group.
It sounds like Talas are happy for the delay because they also have bigger fish to fry.
These tax considerations revolve around the fiscal rules. A core rule is ‘debt should be on course to fall as a share of national income in five years’ time’.
If the EPL expired in Mar 2028, then tax revenues would also fall. Extending the EPL out another year provides additional fiscal headroom in next weeks budget, i.e. room to cut taxes which are more likely to catch the electorates attention.
Hunt is also considering a change to taxing of non-doms.
Labour has already identified these two areas within the few concrete tax plans they have in mind to support their spending goals.
This is politics. Hunts is shooting Labour’s fox before it gets in the hen house.
These changes will happen anyway under what is a near certain Labour government.
There is still a clear political divide between Labour and the Conservatives - with the SNP very much in play – on the Labour proposal to raise the EPL to an effective tax rate of 78% and remove the EPL allowances. Theses allowances are the ‘full expensing’ allowance which is available to all companies against their corporation tax, and the additional allowance worth 29%, which was introduced to incentivise investment in the North Sea.
Currently, the UK NS tax regime is supportive of continuing investment by the O&G sector. Removing the EPL allowances would be the sectors death knell. This is the battle ground leading into the election.
Before the Russian invasion and resultant energy crisis we had Covid, which impacted - to the downside - energy prices and put much of the energy complex at risk. I don't recall any actions by the UK government to support the North Sea sector. However, the Norwegian government did take action.
Norwegian tax relief in response to Covid
‘In June 2020, the Norwegian parliament enacted temporary changes in the petroleum tax act to help oil and gas companies execute planned investments.’
‘Full depreciation, plus 24 per cent uplift, in the investment year, in the special tax base. Applies to all investments in 2020 and 2021, and investments until planned start of production under development plans delivered to the authorities before 1 Jan 2023 and approved before 1 jan 2024.’
‘In the second quarter of 2023, Wintershall Dea and its partners received approval from the Norwegian Ministry of Petroleum and Energy (MPE) for plans to develop the Dvalin North field and the second phase of the Maria field in the Norwegian Sea. The MPE also approved six addi tional developments where Wintershall Dea is a partner: Irpa, Solveig Phase 2, Njord Electrification, Snøhvit Future and the Skarv field satellites Alve Nord and Idun Nord. All eight approved plans for development and operations (PDO) were applied for in Q4 2022. The respective fields are expected to go successively into operation from 2025 onwards.’
The reason I raise this is to highlight that a number of current developments by WD as operator (2), non-operator (6), were initiated and approved ahead of the deadline and (as I understand it) will continue to see the benefit of the uplift in allowances on CapEx spent through to planned start of production, c. 2025-28.