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.

January 11, 2024

TW., HWG, GFTU, MER, SVS, LMP, LXI | News – HS2 costs balloon again; Government views four-fold expansion of nuclear power

Company news

Taylor Wimpey (TW., 148p, £5,247m)

UK number two housebuilder by volume. FY (Dec) trading update. Guidance: “We continue to expect full year group operating profit to be at the top end of our guidance range of £440 – 470m”. YE net cash, £678m (£864m).

Trading: Total completions -23%, 10,848, of which 23%, affordable (FY 22, 21%); prices +3.5%, £324k (private +5.1%, £370k). Land bank c. 80,000 plots (c. 83,000).

Outlook: “As previously guided, we enter the year with a reduced order book. Whilst too early in the year to gauge customer behaviour, we have seen good levels of enquiries so far this year and it is encouraging to see recent mortgage rate reductions. The planning environment remains challenging and will continue to impact outlet openings. However, we remain well positioned to optimise our strong landbank and strategic pipeline and remain confident in the attractive medium and long term fundamentals of the sector. As expected, prevailing build cost inflation continued to moderate throughout H2 2023 and is now running at 0 – 1% on new tenders. We expect underlying build cost inflation of c.4% on H1 2024 completions as inflation contained in the opening work in progress balance is realised”. FY results, 28 February.

Harworth Group (HWG, 126p, £408m)

Land regeneration group, including in former coalfields. Land sales. 964 residential plot sales completed in December, to bring its total for the year to 1,170. “A number of further land parcel sales are expected to complete in the coming months, reflecting continued housebuilder appetite for Harworth’s de-risked serviced residential land product”. The December transactions comprised six land parcel sales in Yorkshire and the Midlands to four housebuilders, and the group’s first forward funding agreement with a registered provider as part of Harworth’s affordable housing portfolio. The total headline price for was £41.2m and all were completed at prices in line with, or ahead of, book values. Outlook: “Our large number of residential land sales at the end of 2023 demonstrates the continued strong demand for Harworth’s de-risked serviced residential land product from a wide range of housebuilders, and we are seeing strong sales momentum as we move into 2024. We are also pleased to have completed our first forward-funding agreement for our affordable housing portfolio, proving the appeal of our mixed tenure model. We look forward to working with our partners to deliver much-needed new homes across these regions”. FY (Dec) 23 trading update due later this month.

Grafton Group (GFTU, 896p, £1,839m)

UK, Irish, Dutch builders’ merchant and products group. FY (Dec) trading update.

Guidance: “Full year adjusted operating profit is expected to be slightly ahead of the top end of analysts’ forecasts [£194 – £201m; consensus, £194m] supported by stronger trading by our businesses in Ireland alongside the timely implementation of previously announced cost reduction measures and ongoing group-wide cost discipline”.

Trading: LFL rev -1.1% (10 months to Oct -0.8%; 2 months to Dec, -2.9%); inc Ireland, -1.2% (-1.7%; +1.5%); UK, -3.2% (-2.8%, -5.2%). “The decline was partly driven by modest product price deflation experienced in the distribution businesses in Ireland and the UK. In Ireland, Chadwicks performed well in the run up to the year end and continued to benefit from an improving trend in daily like-for-like revenue.  Demand was firmer in the residential repair, maintenance and improvement and new build markets and in segments served by Chadwicks specialist brands.  Our UK markets remained weak and RMI volumes continued to be under pressure due to lower discretionary spending by households on their homes, the decline in housing transactions and a fall-off in larger home improvement projects”.

Outlook: “We made good progress during the year developing and executing our strategy and in starting to build a deeper pool of acquisition opportunities in targeted European markets. We remain confident in the medium-term drivers of demand in our markets and, underpinned by a strong balance sheet, Grafton is well positioned for growth as trading conditions improve”.

Mears Group (MER, 313p, £318m)

UK housing support services provider. FY (Dec) trading update.

Guidance: “The strong financial performance reported in the interim results on 4 August continued through the second half of FY23. The Board anticipates reporting results for the full year that are modestly ahead of market expectations with revenues and adjusted profit before tax in excess of £1,050m and £43m respectively. This strong momentum is expected to continue into 2024 and, as a result, Board expectations for FY 24 now sit materially ahead of market expectations”. YE 23 net cash, c.£105m and average daily net cash, c.£75m, “both of which are ahead of previous guidance”.

Outlook: “The Board continues to anticipate a reduction in management-led revenues as the elevated activity level seen across FY23 normalises. However, adjusted profit before tax in FY24 is now expected to be of a similar quantum to FY23, reflecting continued margin progression. The Board expects to see continued strong cash performance in FY24. With share purchase authorities obtained at the June 2023 AGM having been utilised in full in completing the buyback programmes in 2023, the Board intends to seek shareholder approval for additional authority to purchase shares and expects to issue a Notice of General Meeting in due course. This will provide the Board with sufficient flexibility in delivering against its capital allocation strategy”.

Savills (SVS, 976p, £1,409m)

International real estate services group. FY (Dec) trading update.

Guidance: “Savills strength across  our Less Transactional service lines continued to provide a resilient earnings stream, with the Consultancy and Property Management businesses performing well, underpinning Savills overall performance. Consequently, the group expects that its full year performance for 2023 will be in line with the expected range of outcomes [u-lying PBT, £85m – £97m; consensus, £91.3m]”.

Trading: “Throughout the year, real estate markets across the globe have been challenged by significantly increased interest rates, geopolitical events and, on a more asset specific level, uncertainties over the future role of offices and the valuation of existing stock in the era of sustainability. These factors together with certain location-specific issues significantly reduced transactional activity in global markets. Those most affecting performance were North America, Greater China, Australia and Northern Europe, particularly the largest markets of Germany and France. In addition, economic uncertainty led to delays in corporate occupier commitments to new leasing activity, particularly in the metropolitan office markets of the USA and Northern Europe. The consequence of this was that global market conditions remained extremely subdued for longer than originally anticipated at the start of 2023, and resulted in the Transactional businesses experiencing a significant reduction in profits for the year”.

Outlook: “The value recalibration process has yet to catalyse market liquidity, with the majority of lending banks continuing to extend existing loan terms, albeit we are now starting to see lenders beginning to exercise their security rights. This began to have a positive effect on market activity towards the year end and should be a catalyst for improved volumes in H1 2024. Whilst it is too early to determine the 2024 outlook with clarity, we believe that H1 2024 will see underlying market improvements, which should set the course for broader recovery in most of our markets during the second half.  This, together with the benefit of our targeted restructuring programme, should lead to substantive overall improvement in performance in 2024 and set the foundation for further improvement thereafter, when the group’s performance should more clearly reflect our globally diversified and strengthened position in many markets”. FY results, 14 March.

LondonMetric Property (LMP, 184p, £2,006m)

Real estate investment trust, owner and manager of grocery-led logistics sites.

LXi REIT (LXI, 103p, £1,766m)

Real estate investment trust, investing in commercial property on long inflation-linked leases, typically 20 – 30 years.

Recommended all share merger, announced as possible on 19 December. For each LXi Share held: 0.55 New LondonMetric Shares. The merger values the entire issued and to be issued ordinary share capital of LXi at c. £1.9bn and represents: a 9% premium to the Undisturbed Closing Price per LXi Share of 99.5p; a premium of c. 13% for the one-month period ended on 15 December; and implies an NTA discount of 4% based on each of the LondonMetric and LXi Rolled-Forward Unaudited EPRA NTAs. Following completion, existing LondonMetric Shareholders will hold c. 54% and LXi Shareholders c. 46% of the enlarged issued share capital of LondonMetric. Potential benefits of the merger: “The creation of a new major UK REIT, with the combined group having a EPRA NTA of approximately £4.1bn, becoming the fourth largest UK REIT, providing better access to capital and increasing share liquidity; the formation of a combined £6.2bn portfolio aligned to structurally supported sectors, with 93% exposure to the logistics, healthcare, convenience, entertainment and leisure sectors; substantial cost and operating synergies, driving faster earnings growth combined with dividend progression through economies of scale, the removal of duplicative costs and increased operating margins and efficiencies”.

In other news …

Rail. The cost of building HS2 between London and Birmingham has ballooned to nearly £67bn at today’s prices, some 50% above from the latest raised Government forecast, due to build cost inflation, The new estimate provided by HS2 chief Sir Jon Thompson is nearly double what the entire project was expected to cost in 2013. Then the whole project, including the planned phase two routes to both Manchester and Leeds, had an original price tag of £37.5bn. Giving evidence to the Transport Select Committee, Sir Jon confirmed that HS2 Ltd’s latest estimate for the London to Birmingham stretch is between £49bn and £56.6bn in 2019 prices. This is at odds with the government’s present expectation, set out in its recent Network North plan, which said the truncated project would be delivered at £45bn. He estimated after three years of industry-wide rampant cost inflation in steel and concrete in particular around £8bn-£10bn should be added to the estimate for an indication of the true cost at today’s prices. Sir Jon also told the committee that he could not guarantee costs would not rise further while contractors were incentivised through cost-plus contracts to spend money. He said that HS2 was currently trying to renegotiate terms with contractors and for the first time had put in place proper management control systems to keep tabs on individual contracts.

Power. The government has unveiled plans it claims could bring about the country’s “biggest expansion of nuclear power for 70 years”, Sky News. The new Civil Nuclear Roadmap describes how the UK could meet its existing target to generate up to 24GW of nuclear power by 2050. If realised, this be would be four times the current capacity and provide a quarter of the UK’s electricity needs. The UK currently has one plant under construction, the 3.2 GW Hinkley Point C, now due to cost £33bn rather than the initially approved £18bn, and come on line years several years late. One further plant is in the pipeline, Sizewell C in Suffolk, which is expected to start running in 2034, ten years later than planned. The roadmap confirmed the government is still considering a further large power plant the size of Sizewell or Hinkley, as well as new small modular reactors from the mid-2030s. SMRs, being developed by Rolls Royce and others, are smaller than conventional plants and can be made in factories rather than on site, making them potentially faster and cheaper to deliver.

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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