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Rapper,

"thank God I took your advice before the wheels came off and am deeply in your debt. I am now quite heavily in Bellway and have added to my cash position so i'm now less "crestfallen" than I would have been without your brains. My thanks again"

You're welcome - though I don't recall giving advice (I don't do that) but perhaps a few comments here and on the blog do the same job...?

One bit of advice I am happy to give, though, is, as far as punning jokes go - don't give up your day job! (though, if you're 88, I don't suppose you still have one of those..?)

Incidentally, your age coincides with my percentage of my investments that are in Bellway... so if they go pear-shaped too, we're both in trouble...!

Strictly

Terrace et al,

Something else to consider with Crest is that not only have they given a warning about profits - and my ten minute consideration on that suggests around 31p EPS for 2019 and 34p EPS for 2020 - they've also given a warning about dividends...

Namely, that they're intending to keep on with the 33p a year - even though this takes out all the earnings as I see it for the next two years - no doubt in order to keep Sid & Doris Bonkers on board providing they don't look any deeper...?

The problem with this is that it means the ongoing BVPS is barely (pardon the pun) even wiping its own posterior for the next two years - so earnings growth from 2021 has to come from improving return on equity thereafter in a period in which, if house price growth has also slowed down, and continues to do so, one might normally anticipate house builder margins to slide as in previous cycles...

Okay, there has been opinion expressed here that property boom & bust is over, but "It's different this time" are reckoned to be the four most dangerous words in investing so it takes a better man than me to go along with that one, Gunga Din....

I had already lost confidence in Crest due to the H1 results, which implied that the 2018 balance sheet had painted an overly rosy picture.

I calculate return on equity and earnings using balance sheet movement rather than using the sometimes, IMO, mythical figures quoted in the accounts.... And that's before you get into the wonderful concept of "Adjusted EPS" that well paid FDs so love..!

Anyway, this originally gave me a return on equity for 2018 of 22%, however this in turn led to an ROE of just 9% for 2019 taking the scribblers' figure of 47p EPS for 2019 and now, with this update, down to 31p EPS leading to 4.0% ROE.

So, if I now also consign the previous balance sheet to the section marked fairy tales and just equalise the two years to 2019, I get 13% ROE.

And 10.5% for 2020. And that's on no underlying value growth due to lumping all the earnings out in dividend.

My concern is that Crest, for the time being at least, might become the new Vicky Pollard of house builder shares - stealing Galliford's crown in this respect, and I've now got them marked down with a precautionary minus 35% weighting which will hopefully be sufficient to keep me from being tempted by any further share price falls until such time as we can see what sort of shape the new big cheese there puts on it all..?

I'm interested to see if Mr Market starts to take this stuff into consideration over the coming days..?

Strictly

No one seems to have commented on Bellway's full year results here today, but I thought Bellway very much delivered a Ronseal job today...

I was happy with the results but, thus far, the market seems not to be.....

Quelle surprise..!

Bellway's BVPS ended up just 0.2 of a percent out from the figure I'd had penciled in for them.

Perhaps Mr Market didn't warm to the inference that there would likely be a drop in EPS for the current year due to the one-off nature of high margins being achieved on the Nine Elms site selling through last year - and ignoring that Bellway have also said they expect earnings growth to continue again after this year and for margins, currently sliding a tad, to steady out...?

Whatever, it seems to me that investors have short memories...

Back in the Credit Crunch s..t storm, Bellway were the ONLY house builder to keep on paying a dividend all the way through, they took hardly any write down on their land bank, unlike others, which, to me, implies that they were happy to expose more authentically the real margin make up they had to achieve in subsequent years after the crunch, and I have now got 37 years' uninterrupted track record for them on the important numbers and they seem so straight from start to finish it almost makes you want to kiss the management..!

And, are we perhaps heading into another investing s..tstorm..?

And I don't mean due to Brexit, I mean due to huge and increasing global financial imbalances (collective human short memory again) that surely have to go pear-shaped at some point?

If we are heading that way, it's worth bearing in mind that Bellway have now got their overall liabilities (as a percentage of net value) down to just 33%.

The next nearest is Battersea Dogs' Home, on 49%.

Redrow and Persimmon, by contrast, are both heading in the opposite direction and are both currently in the mid 60%s...

And Crest are over 90%, and increasing.

As Warren Buffett says, when it comes to investing, be bold when others are fearful, and be fearful when others are bold...

And it looks to me that Bellway, the long term purveyor of successful moderation, are becoming cautious.... they might currently be paying a small price for it in terms of return on equity with non-existent gearing on borrowings but, as Mark Claire of Barratt showed us when he borrowed big to buy Wilson Bowden, and also Tom Hunter when he did likewise with a leveraged buyout to purchase Crest, the big egos out there sometimes get it seriously wrong...

And then it's shareholders wot takes the hit...

And thirty seven years of prudent track record is good enough for me, and the upshot is that Bellway are now, by some degree, my largest holding.

Strictly

Nige,

"My point was that even if you estimate actual results within 2% before they are produced, it doesn't help much if (as the market expects), house prices drop by 12 % after Brexit. Far easier to just watch house prices. As I have said I think there is no chance of that, so agree with Jeffries."

I don't understand this, really... I work with a simple but straightforward approach of trying to determine BVPS as accurately as possible because this plus price are the elements in calculating PBV as accurately as possible (obviously, duh...) and, IMO, PBV for me is the biggest influence for determining perceived value and which therefore significantly contributes to the baseline for me to trade upon.

It has absolutely nothing to do with guessing where the share price may go - shifts in that relative to different house builders just opens up changes in PBV and so, from time to time, present opportunities to trade...

And, if they don't move, well, like the great man said, if you wouldn't hold a share for ten years, why hold it for even for ten minutes..? I subscribe fully to that too...

And given that, on the whole or at least so far as we can realistically work with, house prices affect all house builders' profitability and given that thus far in nearly twenty years in this game, I have remained fully invested throughout apart from cash required for living costs and all that, from any practical point of view, while what the housing market may or may not be doing is of some interest to me in this, taking a view on it is of little to no practical use to me.

So, in respect of your last sentence: "What do you think of my ideas? Particularly the 4 growth, 4 decline (and all decline at times) per year. As I said all messed up by Politics now, but maybe potential?" the short answer is that I'm not sure because, having thought about it and also during the course of some discussion today off-LSE with Cyber on this and other topics, I'm not seeing where it connects usefully with what I'm doing...?

Perhaps it's the case that trying to match any sense of where the market is going short term with that of perceived underlying value is like trying to mix oil and water...?

So, I hasten to add, I'm not trying to be negative about what you're saying it's that I'm not seeing where any of it fits for me and also, to be honest, not understanding it that well either...

But clearly, in the bigger picture, in terms of what I, and I think I can say Cyber too, are into in switching between house builders shares to try to improve gains beyond underlying performance, I would say that you are still closer to that than any of the other regular commentators here..?

Strictly

Nige,

With regard to PBVs, for the companies I estimate BVPS monthly for (which are those which I consider to be in the frame value-wise), I have these for Bellway at 1.32, Crest at 1.12 and Redrow at 1.36 up to end of October.

Once again, with regard to the property cycle and whether or not that's a thing of the past, as I said, surely what matters to us as investors in house builders' shares is the profitability of the companies themselves..?

Early days (well, early years) on this yet so hard to tell, but Barratt is still going up (for six years running now), Bovis wobbling about, Bellway gently down for the past three years, Crest's accounting, IMO, is a bit iffy in respect of accurate earnings and book value, but are down, Persimmon down and for conspiracy theorists there may be a story to come there now our pal Geoff has gone, Redrow have bounced around, and Taylor Wimps have gone sideways...

So, the main indicator is from the scribblers' forecasts - and they would have us believe that profitability in terms of return on equity is heading distinctly downwards even if they do still generously suggest small increases in earnings per share going forwards.

And if house price growth does slow, as it seems to be doing, that evaporates some of the extra profit made on the land value improvement between when the plot was bought and when it is sold with a pile of bricks on top.

And, as I imagine we all understand here if this sector is very much our game, it is the shifts in the cost of the plot relative to the sale price of the house which are the main underlying cause of the exaggerated effect that the property cycle has on builders' profits.

So, bringing it back down to your assertion, if you are right about the property cycle being a thing of the past (and I think if you take a good look at the graph for inflation-adjusted house prices on the Nationwide's website,
https://www.nationwide.co.uk/about/house-price-index/download-data#xtab:uk-series
that might well support your theory - but I'm not bold enough to take a view on that here), it is surely still possible that periods of accelerating and slowing house prices could effectively still bring about a business cycle for the house builders themselves..?

To be frank, Nige, I hadn't previously stopped to consider this in this particular light before - so thanks for pushing me on it as I feel it's given me a bit more clarity and I'd be interested to hear what you and others here think about this...?

While it doesn't really change anything in terms of investing, it can be good to square circles sometimes...

Strictly

Nige,

You may or may not be right about the end of the property cycle - but I've still got Gordon Brown ringing in my shell-like about the end of boom and bust, so i guess we'll just have to see...?

Starting with 14th October, perhaps..? (Bellway's final whistle due)

The scribblers have Bellway in for 439p EPS, an increase of just 3.7% on last year's and a return on equity of 21.1%, which is down on 2018 at 23.8%, which is down on 2017 at 24.7%, and which is down on 2016 at 25.0%.

I've got Bellway pencilled in for 445p EPS for 2019, and increasing at about 4% a year from there.

Allowing for about a third paid out in div, that makes Bellway's ROE drift down to 14.6% by 2025.

I've then taken a suggested 13 year cycle from 2013 to 2025 and the average ROE for that, which is largely therefore forecast rather than actual of course, is 18.6%.

This compares to a 13 year cycle 1994 to 2006 for which the average ROE is 21.0%.

So, that's quite a difference and it means that though I'm more optimistic than the scribblers (not a high bar, of course...) I'm hopefully still significantly understating the profitability as it will actually be for the coming six years...?

Who knows, but both my and the scribblers' numbers give the lie to the commonly held notion that house builders are making excessive profits due to Help to Buy...

I suppose we have Geoff Fairburn that thank for that...?

Thanks, Geoff..!

So, where you and I seem to very much agree is that we both consider house builders to be brilliant value and that, overall, they pretty much always have been.

I think it's brave of you to call the end of the property cycle, though...

Rather you than me on that one, Gunga Din...!

If the numbers only achieve what I've plugged in then I'm not complaining though...

I suppose, bit by bit, we'll no doubt see with the ongoing unfolding of results.

As I said, if the scribblers are right, this year will see the third fall in profitability in a row for Bellway - that most stable of house builders.

Whether or not house prices experience another cycle, what surely matters to us is the extent to which house builders do in terms of falling profitability....

Isn't it..?

Strictly

Nige, James, Cyber, Sain, Steph, Terrace et al,

Sitting here with my coffee, I thought I'd throw out a bit of Sunday morning reflection in case you're bored of reading about Boris..?

I think it's fair to say that we all like to go into the ins and outs of a duck's arse in these share chats.... and that definitely includes, me, by the way.

However, when you really, really boil it down, it comes to two things.

One is the price and the second is the underlying rate of progress of the company.

And we have plenty of history available on this, so it's not really much of a mystery.

On average, the market has been happy to pay around 1.5 price to book value for a house builder's share...

The funny thing with that is that one might imagine the price would spend a fair amount of its time hovering around at that level - but, no, it usually seems to want to move sharply through 1.5 either heading up or heading down.....

Who can read its mind....?

Except, unless you're a believer in what are reckoned to be the four most dangerous words in investing, "It's different this time", it will almost certainly keep revisiting 1.5 PBV again....

I do agree with Nige, BTW, that prices should reasonably be higher than they typically are - but that's the market for you, it is what it is.

The second point, the rate of progress, is pretty straightforward too...

it's about 15% a year.... that's been the average return on equity for sensible house builders over the decades.....

Our job, as investors, is surely mainly to avoid the silly ones (unless, perhaps, they are so stupidly cheap that it's an offer we can't refuse...?).

1.5 x book value and 15% a year progress, then.... that, and not the hokey cokey, is what it's really all about....

So, under 1.5 and it's probably cheap, and over 1.5 and it's probably expensive, and everything else, much as we clearly all love chatting about it, is just so much surmise and speculation for the most part.

Of course, moving around between shares is an additional element - but I'm not bringing that in here as I'm then likely to lose people from the basic point I'm making.

And despite all I've just said, I'm STILL keenly awaiting Bellway's full time whistle, due in a couple of weeks, to see if, like, Crest, Redrow and (big time for) Telford, they're going to disappoint me this year...?

So we're all incorrigible, aren't we..?

Strictly

Colinco,

I've just re-read what you've written a couple of times to try to get to grips with it in order to give you a hopefully more worthy response...

I'm looking for underlying value gain, which is probably different to absolute returns, as you put it, as I'm imagining that's dependent on what the market does and is therefore beyond my perceived skill set as I am completely unable to call short or medium term market movements...

For example, your comment "As share prices fall, the absolute return investor's wealth rises in the long term, as shares are purchased at lower prices" surely requires the market to turn around, or, at the least stop falling, once you've bought in at your lower prices...?

Because if you're relying on a better price further on, that surely implies that the value of the share will grow and that the market will therefore come to its senses in due course..?

In which case, surely you're back to underlying progress being made - which is where I'm at, only my experience says it's easier to accelerate that by moving between different shares (in my case, 100% house builders - hence the moniker) than between shares and cash - which is far too scary for an investing wuss like me.

Otherwise, if you buy in albeit at lower prices, but you've called it wrong, then surely if the market keeps on falling then your absolute returns are steadily evaporating.

Whereas, by constantly seeking better underlying value and always being prepared to move towards it, I don't need to take a view on what the market might do next week or next year because I fully agree with Warren Buffett in his pronouncement that in the short term the market is a voting machine but in the long term it's a weighing machine.

That has certainly held true, and proved its worth, for me over the past twenty years of investing.

But, of course, that's not to say that other investing strategies, such as yours, wouldn't work equally well (and I really don't have a view on that) but, as the saying goes, if it ain't broke, don't fix it.

Strictly

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