Rising rents attract investors back to market

Residential-for-rent developer and manager Watkin Jones on 25 January delivered FY22 results that were broadly in line with our expectations. Continuing strong demand for its core rental developments, as highlighted in October, was hampered by delays in investment decisions following the mini-budget. We believe recovery has begun, albeit on a slightly shallower trajectory, and current market conditions may offer the group opportunities. Surveys show continuing rental growth, attracting back investors but stretching affordability – we see WJG as ‘part of the solution’.

Rising rents attract investors back to market

Leading UK brick and concrete products group Forterra confirms in today’s trading update that FY22 adjusted PBT slightly exceeded management expectations despite the housing slowdown after September’s mini-budget. We are slightly ahead of consensus at £69.1m and maintain our estimate, but net debt was significantly better than our forecast. Given the uncertainties in housing, we have not yet issued forecasts for FY23E but believe more clarity may emerge at the final results in March, when we suspect the market may be healthier than many fear.

Strong FY22 performance, uncertainty ahead

Springfield Properties, Scotland’s only quoted housebuilder, has prudently, in our view, adjusted its guidance for FY23E due to more challenging housing market conditions and specific external factors referred to in September’s FY22 results. Consequently, we cut our estimates for FY23E and, again prudently, for FY24E. Our sector view is that the market may decline less than widely feared, but for now we adopt Springfield’s conservative view.

Taking a prudent outlook in uncertain markets

Springfield’s longstanding focus on sustainability, which it detailed along with social and governance commitments in its September ESG strategy report, was recognised last week in top housebuilding awards for two of its ‘Village’ developments – in our view, one of the multi-tenure developer’s key differentiators. Scotland’s only quoted housebuilder has, on these and other locations, provided a range of green energy, social initiatives and innovative approaches to construction.

ESG credentials spotlighted in industry awards

Leading UK brick and concrete products manufacturer Forterra has confirmed FY22E guidance in today’s trading update, which highlighted ‘robust’ trading for the 10 months to 31 October. We have maintained our FY22E adjusted PBT at £69.1m. We believe that recent sales weakness highlighted by housebuilders could have only limited impact due to the ultra-low inventory levels in the UK brick industry.

Forecasts maintained amid ‘robust’ trading

We have kept our FY23E-25E PBT estimates for Severfield, Britain’s top steel construction specialist, as its FY23E interims maintained guidance amid ‘consistently high’ demand in the UK and Europe and strong growth in India. Inflationary pressures remain well-managed. We believe Chancellor Jeremy Hunt’s Autumn Statement confirms the strong long-term outlook for energy and infrastructure, as explored in our extensive recent report.

Interims confirm sustained infrastructure drive

Prospects for Severfield, the UK’s top steel construction specialist, should be underpinned not only by existing markets including infrastructure and datacentres but also, longer term, by three key themes: security, decarbonisation and lifestyle changes. The group’s specialist skills ideally place it for new nuclear, green energy and ‘gigafactories’. This wide-ranging note peers over the horizon to Severfield’s longer-term opportunities.

Opportunities abound amid new world order

Today’s RICS housing market survey, in our view, paints a much brighter picture of Watkin Jones’s rental sector than that in the sales market. Surveyors expect strong growth in rents to continue, driven by strong tenant demand and constricted supply. We believe that part of the reason for the arguably excessive reaction of the share price to last week’s trading update may be the weakness of the national housebuilders, but they operate in the currently more challenged sales market.

RICS survey highlights strong rental market

We note that the Chairman and CEO of Watkin Jones yesterday purchased over 72,000 shares between them after a large fall in the price following that morning’s trading update. We believe this demonstrates management’s view that the market had overreacted to the announcement and that, despite guidance being lowered, they remain confident in the long-term prospects for the residential-for-rent developer and manager. We continue to believe that these prospects will be driven by strong demand from tenants, underpinning rental income for the group’s institutional clients.

Board’s share purchases highlight confidence

Residential-for-rent developer and manager Watkin Jones has confirmed in today’s trading statement a strong operational performance in the second half of the year to 30 September 2022, with investor demand for rental assets remaining strong and good visibility going into FY23E. However, the group said it had encountered some pricing and margin softness as its institutional investors faced increased funding costs. We have reduced our estimates for FY22E and FY23E but remain confident in the longer-term prospects, driven by strong demand from tenants, which has boosted rents.

Strong rental market offset by margin pressure

Springfield Properties, Scotland’s only quoted housebuilder, has delivered record FY22 results despite supply chain pressures, with homes completed rising 28%. Adjusted PBT rose 12% to £20.8m, 5% below our estimate mainly due to challenges in Affordable Housing (AH), while Private Housing continued to perform strongly. However, the Scottish government’s temporary freeze on rents will inevitably impact AH and Private Rental Sector (PRS) volumes, necessitating us to trim our PBT by 9% and 8%, respectively, for FY23E and FY24E. Despite this force majeure, we remain confident in Springfield’s longer-term outlook.

Record result against inflationary backdrop

Severfield, the UK’s top steel construction specialist, confirms in today’s AGM statement that performance in the first five months of FY23E has been strong and that trading is in line with management’s expectations. We are not changing our estimates but highlight what we believe to be major growth prospects in response to rapidly changing geopolitical and climate change priorities in the group’s markets in the UK, Europe and India.