Redrow (‘company’) is a UK-based residential home builder selling homes under the ‘Heritage’ brand. They focus on the home mover segment.
The industry is currently facing headwinds from rising interest rates, which is likely to adversely impact housing demand.
Operating conditions in the last two years were better than average with a buoyant housing market where selling prices exceeded cost inflation. Demand is expected to moderate to the historical average in the medium-term.
The company reported its FY22 figures (year-ended July 3rd 2022) on September 13th with sales, ebitda, and net profits of £2.14b, £416m, and £197m respectively.
Pre-tax earnings have averaged £375m in the recent past, and were backed by cash flows. The tax rate is, however, expected to rise from 19% to 25% in April 2023 – and normal after-tax earnings are estimated at ~£280m.
The balance sheet is strong with £288m of cash and no borrowings. (The company has access to revolving credit facilities of £353m).
Net current asset value (largely comprised of inventory) amounted to £1.92b – including pension surplus of £39m. Tangible asset value stood at £1.95b.
Returns on tangible assets are ~15%, which corroborates the company’s attractive market position.
The key focus is inventory valuation comprising largely of land for development of £1.71b, and work in progress of £962m.
The company and the auditors have focused on this area with their own quantity surveyors, and the above figures are adjusted for net realizable value provisions reflecting market conditions up to September. (Also note that the company’s operating cycle lasts around four years.)
The equity currently sells for £1.4b, which is at a 27% discount to realizable asset value, and ~5x normal earnings. Net of excess cash, the operating business trades for under 3x pre-tax earnings.
Management appears to be shareholder oriented with dividend payouts of ~1/3rd of net profits. The latest proposed dividend of £77m yields 5.5% at market. In addition, they have initiated a £100m share buyback program due to the current discount to net asset value.
The company has orders in hand of £1.4b, which exceeded the record set in FY22 and should give it a head start for FY23.
This stock appears to be selling for less than the debt that could be safely issued against it, and is one of the better-quality investment bargains we’ve found – especially outside of Hong Kong and Japan.