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Manfor
The reason house builders were decimated in 2008 was that they entered a sudden crisis with massive amounts of debt eg Barretts and TW were c. £2bn net debt. They therefore needed highly dilutive c. £500m right issues and this wiped out share prices. Today Barratts are over £2bn net cash, TW £750m. It’s chalk and cheese. Worst case they can easily stay solvent by simply not buying new land, using the cash pile to pay off contracted land creditors.
Gleeson are an absolutely nailed on takeover target. Tasty snack size for PE or anther HB. Only problem is that all HB’s would want a share deal and their shares are bombed out.
Gleeson has a great balance sheet and is exactly the sort of HB that Truss will want to succeed. It’s suffered a sector worse share price decline but has the best growth potential. Good land bank as well, important to compare land banks and land creditors.
Vistry clearly not worried about the impending house price crash! They are probably the most resilient of all the HB’s but still indicates that the market has oversold the sector.
Berkeley, Bellway and Vistry all update this week, Gleeson next week. Results will be excellent, that’s a given. It’s all down to the forward guidance and especially what the HB’s are doing about the imminent slowdown.
I hope they temporarily reduce land buying, prioritise cash flow and use the money for massive share buybacks. Many are trading at a discount to NAV, crazy not to buy back
HSBC have downgraded the sector, claiming demand will drop 20% over next year. Barratt slashed from 930p to 430p! Now Hold from Buy.
Only share they still like is Vistry. However all the Brokers have different opinions! Berkeley , Bellway and Barratts seem to really split the pack
Barratts, Bellway and Vistry announcing results next week. I’m assuming will sanction massive share buybacks.
Also Liz Truss will have to do something re CoL which should help HBs.
And Corporation Tax cut will help
‘Building on the proactive approach to land investment in the prior year, the Group has contracted to acquire 19,089 plots(5) during 2022 (2021 - 19,819 plots, 2020 - 12,124 plots) across 107 sites(5) (2021 - 109 sites, 2020 - 69 sites).’
HB’s such as Taylor Wimpey looks better re land bank value because they bought more in 2020?
The dividend is very likely to be cut in a downturn since not covered. Brokers range from 150p to 175, still good at this price.
PSN has fallen 20% over the last month, rest have fallen c. 12-13%
Bull case 2,900p, Base case 1,600p and Bear case 900p.
Bear case assumes 7% fall in house prices and P/B of 1 (10 year trough is 0.8, 30 year 0.4 P/B)
Current Net cash is c. £780m? At the end of 2008 (Sub Prime and I assume the reason for the 0.4-0.8 P/B) total liabilities were £1.6bn and Net Assets £1.55bn. Gearing 40%. As I said yesterday, it is a ludicrous comparison?
Strictly
I’m loathe to compare historic P/B since so many other factors. You may have seen Morgan Stanley’s recent note The Big Bad Wolf? Their bear case for TW is 55p but imo their analysis is ludicrously flawed because they assume a P/B similar to past cyclical lows when HB’s were billions in debt (and required heavily discounted rights issues to survive) versus now when the HBs are sitting on shedloads of net cash. This is why I’m invested in all the HBs although I am range trading.
Re PSN margins, they have been criticised for not land buying during CV-19 and are now playing catch up at presumably less attractive prices. They are also suffering because HBs need a large pool of plots to navigate planning uncertainties.
Are their margins good because focused on the lower end of the market, maybe less competition and the building plot a smaller % of the overall cost?
Also are they able to make superior planning gains from change of use. eg upmarket HB’s such as Redrow more at risk from NIMBYs.
Maybe they are much more conservative in valuing their land bank?
PSN have sector leading margins but how will they maintain this as they deplete their historic land bank and build out more recently acquired land? They didn’t buy cheaply during Covid when TW did.
Also PSN is one of the few HBs trading at a premium to NAV. I hold all the HBs but prefer TW and Vistry. Sold a large chunk of into Redrow into recent spike.
Investec have said they expect dividend to be nearly halved next year. This is why shares are falling! Even so, now in the price
Except that inflation is two edged. Some material prices are now falling and will obviously fall more with any slowdown. Hence we would get falling house prices and falling inflation
Share price clearly reflecting market concern that the dividend will be cut. PSN did not specify the next dividend today?
How much of a cut is now in the price?
That’s 500p for OTB!
Strong summer trading results from Tui today albeit uncertain outlook
Peel Hunt have 500p Price Target
Agree that c.100p implies that cash is dangerously low but why? Summer season should be cash generative. And they appear to have sufficient banking facilities in place.
No shorters is a good sign.
House builders may be the canary re cost of living issues. They are all down today on house price concerns next year but current trading is still strong. ie there is still plenty of money out there. TW announce tomorrow.
Only other -ve is that OTB handed back deposits in cash and are now struggling for market share as rivals redeem coupons. But this must be short term and OTC should gain goodwill
Now read the MS note which I don’t understand.
Their bear valuations are based on arbitrary future discounts to current NAVs based on max discounts over both the last 10 years and last 30 years. This looks nonsensical. Discounts to NAV reflect markets concern that TW will go bust. How can you possibly compare 2008 and with now?
O/W, PT 3,066p
Higher PBT margins expected H2 v H1. Confident on 2023 volume growth. Build cost inflation higher than peers at 8-10%.
Demand remains strong but current seasonal lows not as good an indicator as Sept/Oct so must wait for better idea re underlying trend. Expecting some moderation in sales next year but higher outlet numbers will compensate.
Also TW trading at a discount to NAV whereas Perimmon is at a significant premium. I hold all the HBs since a great mid term buying opportunity and no one can call the bottom. If house prices fall more than 20% then nothing will be safe. Will chase down my favourites - TW, Redrow and Vistry.
Re MS note, it’s titled ‘Big bad wolf to blow on HBs’. They favour Berkeley and Barretts with a Neutral and underweight TW and Persimmon as most exposed to cost of living squeeze. It’s all macro. Expect media coverage in tomorrow’s papers.
Thanks I was rechecking my note and see that the new CEO confirmed their commitment to the 7.5% NAV dividend and that this had been stress tested down to a 20% house price fall/30% fall in volumes. This was at the CMD end May
Wigan
Good post. I’d add that chronic shortage of land, WFH and cost of renting will support prices. And imo interest rates won’t rise as high as some fear although only because we are teetering on recession!
Very interested to see that Morgan Stanley have updated this morning. They have slashed TW from c. 180p a few months ago to 104p, Underweight! This is out of kilter with all other recent broker updates which are averaging c. 180p.
They have slashed other HB’s as well, including Persimmon at 1,600p. According to a tip in the Times today, Persimmon is rated Avoid, in part because they didn’t replenish their land bank at cheap prices during Covid and are now having to pay top $. However TW raised £500m at 145p mid 2020 to do just that.
And Directors recently bought £70K of shares (plus £500m during above placing).
So how on earth can Morgan Stanley say 104p?
I won’t get the note until next week but intrigued! May be it’s just gauging poor sector sentiment, the price needs to go beyond crazy before the institutions pile in.
I am a bit concerned that TW is about the only HB being shorted? Albeit under 1%