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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September 6, 2023

SFR, BDEV, WINK | Economy – UK construction continues to grow (just) | News – ‘low risk of RAAC in social housing’

Company research

Severfield (SFR, 68p, £210m mkt cap) – SFR is a client of PERL

Britain’s leading structural steel group, with sales to Europe and a rapidly growing Indian JV. AGM statement. Link to Progressive Equity Research note, FY outlook on track amid ‘positive’ markets:

“We are maintaining our forecasts for FY24E and beyond after this morning’s AGM statement from Severfield, which confirms that trading in the first five months has been in line with the group’s expectations, aided by its strong balance sheet. This is despite more challenging conditions in recent months due to building cost inflation, while the long-term outlook continues to be underpinned by new markets, such as datacentres and ‘giga-factories’, and the group’s expansion in the EU and India.”

Company news

Barratt Developments (BDEV, 443p, £4,320m)

UK’s biggest housebuilder by volume. FY (Jun) results. Completions, -3.9%, 17,206; rev +1%, £5,321m; adj op margin, 16.2% (FY 22, 20.0%) adj PBT -16%, £884m; stat PBT +9.8 %, £705m; adj EPS -19%, 67.3p; div -8.7%, 33.7p; net cash £1,069m (£1,139m); TNAV, 467p (447p).

Trading: “Whilst there remains a clear need for increased housebuilding in the UK, short-term demand has been impacted by mortgage affordability challenges”. Private sales rate, FY24 to date, 0.42 (0.60 for same period in FY23 and 0.55 for the full year). Indications from the results meeting were that underlying headline prices and incentive levels continue to remain at similar levels to Q4 CY22, in the immediate aftermath of the mini-budget in September. Costs associated with legacy properties totalled £179m (£412). Of this total, £118m (£378m) related to future commitments in relation to fire safety and external wall systems with £51.5m (FY22: £34.8m) relating to remedial works arising from the review of reinforced concrete frames announced in 2020. A further c. £10.0m was expensed in the second half in relation to two other developments, where investigations are ongoing. FY24 guidance: As outlined in the trading update of 13 July, based on current market conditions,  total home completions of between 13,250 and 14,250 in FY24; build cost inflation of 5%. The combination of build cost inflation, lower overhead recovery and mix of sites appears to bring consensus gross and operating margins down to 16% and 9% respectively. Highly selective in land purchases; year end net cash to be c. £0.7 – 0.8bn. Ordinary dividend cover will be in line with 1.75x cover policy; “Given current market uncertainty, the Board has decided to retain surplus capital [rather than continuing share buybacks] to maintain the resilience of the balance sheet”.

Viewpoint: The view from the meeting was that prices had been more resilient than previously expected, with virtually no signs of down-valuations by lenders; sales rate was probably slower than expected; while build cost inflation is coming down, labour is ‘stickier’ than expected; and land prices have still not yet reacted to the more challenging outlook.

M Winkworth (WINK, 145p, £19m) – PERL provides research services to Shore Capital on this stock

Franchised estate and lettings agency, focused on London and SE. HY (Jun) results. Group rev unch, £4.3m; PBT -24%, £0.8m; EPS -31%, 4.33p; combined Q1 & 2 divs +7.4%, 5.8p; net cash, £4.2m (£4.1m).

Trading: Gross revenue for the mainly franchised group slipped by 5% to £26.4m. Sales revenue fell by 18% to £12.3m; Lettings & Management rose by 10% to £14.0m.

Outlook: “In Sales, pipelines of agreed sales have started to rebuild since the start of the year but, as transaction timeframes have been slow, many of these agreed sales will not complete until H2 of this year. As a result, we would anticipate that the number of completions will firm up as the year progresses. We expect sales market activity to be underpinned by strong employment, sellers coming to the market to manage mortgage cost increases, and buyers motivated by the lack of availability of suitable rental accommodation.  Expectations are increasingly that, having entered a new era of structurally higher interest rates, we will not be returning to the ultra low levels previously seen. The growing belief is, therefore, that there is no purpose in further delaying a purchase if suitable funding can be arranged”.

Economic data

Construction PMI. UK construction activity continued to increase in August, albeit at a slower rate of growth, according to the latest S&P Global / CIPS UK Construction Purchasing Managers’ Index. The index for August was 50.8, still above the no-change threshold of 50, but down from 51.7 in July. Growth in the commercial (54.2) and civil engineering (52.4) segments helped to offset continuing weakness in house building (40.7), the second-fastest decline since May 2020. Suppliers’ delivery times for construction products and materials meanwhile improved at a “robust” pace. The respective index eased slightly since the previous month, but was still the second-highest since April 2009. Survey respondents widely commented on improved stock availability and fewer pressures on supplier capacity. An improved balance between demand and supply helped to stabilise overall input costs across the construction sector. Meanwhile, the Eurozone recorded its sixteenth successive deterioration in total activity, slipping from 43.5 in July to 43.4 in August (see below).

Construction PMI, index

In other news …

RAAC concrete. Use of reinforced autoclaved aerated concrete is ‘not widespread in social housing’ according to the sector regulator, Building (paywall). The lightweight concrete behind the closure of 100 schools is not likely to be “widespread” in social housing, according to the English regulator of social housing. Consultants have warned that RAAC panels may have been used in social housing built in the 1950s to 1970s. A spokesperson for the Regulator of Social Housing (RSH), however, has said the watchdog does not believe RAAC to have been widely used in social housing in England.

Prices are as at the previous day’s close. Where quoted, net debt is pre-IFRS16 (excluding leases) unless otherwise stated.

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Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

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