Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

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February 7, 2024

BDEV, RDW, GRI | Economics – House prices rise for fourth month, Halifax

Company news

Barratt Developments (BDEV, 530p, £5,165m mkt cap)

UK’s biggest housebuilder by volume.

Redrow (RDW, 600p, £1,985m)

Top 10 UK housebuilder.

Recommended all-share offer for Redrow and HY (Dec) results for both companies. Details of offer: for each Redrow share, 1.44 new Barratt shares, implying a value for the entire issued and to be issued ordinary share capital of Redrow of approximately £2,524m, a premium of c. 27.2% to yesterday’s closing price. Immediately following completion, Barratt shareholders will hold c. 67.2% and Redrow 32.8% of the combined group, offering “a strong brand portfolio with three high-quality, complementary brands including Redrow positioned as its premium brand, and offering customers a wider range of home types and price points and accelerating delivery on sites, a strategy that Barratt previously successfully executed through the acquisition of David Wilson Homes”. Steve Morgan, Redrow’s founder and largest shareholder (holding c. 16% in Redrow through his family investment vehicle), is supportive of the combination and Barratt has received irrevocable undertakings to vote in favour of the scheme of arrangement. Completion expected in the second half of this calendar year. The Barratt Board believes the combination can achieve pre-tax synergies of at least £90m, of which approximately 90% of which is expected to be delivered by the end of the second year following completion. One-off costs, approximately £73m, of which c. 57% to be incurred in the first year following completion and c. 32% in the second year. The combination is expected to be accretive to Barratt and Redrow’s respective adjusted EPS in the first year after completion, excluding one-off costs of delivering synergies. The current main Barratt Board members will hold equivalent positions, and will be augmented by Matthew Pratt, Group Chief Executive of Redrow (to become Chief Executive Officer, Redrow, and Group Executive Director) and Redrow non-executives, Nicky Dulieu  and Geeta Nanda. Barbara Richmond, Group Finance Director of Redrow, has agreed to join to support the integration for a period of not less than 12 months to ensure continuity. The combined group – which will have capacity to build at least 22,000 homes a year – will be renamed Barratt Redrow.

 

Viewpoint: I didn’t see that one coming (nor, it seems did any of the non-insiders crowding into the combined two companies’ results and deal meeting). You’d have thought Barratt would have learned from ‘the last time’. It appears it has. Barratt’s acquisition of Wilson Bowden, just before the Global Financial Crisis, was followed by a near-death experience (shared in some other mega-mergers of the time). This time it’s different. The Willson Bowden deal was done just before an over-inflated bubble gave way to a post-nuclear winter; this time the market has been gently picking up from a deepish low, with interest rates likely to trend down (see Halifax prices, below). The last deal was fuelled by debt; this is all equity. Operationally, it seems to make eminent sense. It brings together three distinct brands: Barratt, leaning to the ‘entry level’; WB’s David Wilson for the family market; and Redrow’s Arts & Crafts-inspired Heritage range, the premium product. The additional brand on larger shared sites could improve the overall group sales rate. The synergies are obvious; and it allows Redrow a wider regional footprint. The apportionment of Board positions and support of Steve Morgan suggest an equitable deal; both companies sharing June year-ends will make the deal a bit easier to execute. From a sector perspective, there was already a widening two-speed market, with all but the biggest companies lacking the economies of scale to address mounting planning, regulatory and cost challenges. Now – following the Vistry acquisitions of Countryside and Galliford Try operations – a true ‘Super League’ is emerging. There is a very clear top five, with Barratt, Vistry, Taylor Wimpey, Persimmon and Bellway. One question will be foremost in the minds of sector watchers: who’s next?

Results (briefly):

Barratt: Completions -28%, 6,171; rev -33%, £1,851m; adj op margin, 8.4% (HY 23, 18.4%); adj PBT, -70%, £157m; stat PBT, -81%, £95m; adj EPS -70%, 11.8p; interim div -57%, 4.4p; net cash, £753m (£969m); TNAV, 451p (462p).

Current trading: Net private reservation rate per site per week from 1 – 28 Jan, 0.60 (0.49). Outlook: “Whilst our full year out-turn remains dependent on how the market evolves through the Spring selling season, based on the encouraging uplift in reservation activity since the start of January, we now expect to deliver total home completions of between 13,500 to 14,000 in FY 24 [previous guidance, 13,250 – 14,250]”.

Redrow: Completions -24%, 1,894; rev -27%, £756m; adj op margin, 11.4% (19.3%); PBT -58%, £84m; stat PBT: EPS -59%. 18.7p; interim div -50%, 5.0p; net cash, £121m (£107m); TNAV, £2,023m (£1,918m). Cash buyers, 37% of private sales (31%).

Current trading: Net private reservation rate per site per week, first five weeks, 0.52 (0.51). Outlook: “The new year traditionally results in increased activity across the housing market and this year it is pleasing to see a return of strong interest from customers”. FY 24 guidance maintained at revenue £1.65 – 1.70bn; u-lying PBT, £180 – 200m.

 

Grainger (GRI, 261p, £1,935m)

UK’s largest listed residential landlord. AGM. LFL rental growth, YTD, 8.3% (FTD 23, +6.1%); occupancy, 97.2% (98.7%). Sales of regulated tenancy homes achieved at prices 2.6% above valuations. “Whilst an increasingly smaller part of the business (c. 23% by value), sales generated from our regulated tenancy portfolio as it unwinds (vacant possession) continue to provide a reliable source of capital for our continued growth. We are seeing good levels of liquidity in the residential sales market.”. Two new build-to-rent schemes in Birmingham and Bristol launching in March, totaling 606 homes. “The operational leverage inherent in our business model ensures that we remain on track to deliver significant growth in EPRA Earnings over the coming years. We continue to achieve record levels of rental growth, and should wage growth ameliorate later this year, we expect rental growth to continue be higher than historic averages, driven by our market-leading operational platform. With local and national elections later this year, we are comfortable that political and regulatory risk for our business is low and that our responsible approach to delivering high quality rental homes for the mid-market is very much aligned to the main political parties’ priorities”.

Economic data

House prices. Halifax House Price Index, from S&P Global. Average house prices rose by +1.3% M/M in January, from +1.1% in December, the fourth monthly rise in a row, to £291k. Y/Y, +2.5%, the highest annual growth since January 2023, and 4.3% above the recent low in September. Northern Ireland recorded the strongest growth, +5.3% Y/Y, Scotland and Wales both +4.0%; North West (+3.2%); South East (-2.3%); London -0.4%. Outlook: “Looking ahead, affordability challenges are likely to remain and further modest falls should not be ruled out, against a backdrop of broader uncertainty in the economic environment”.

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