When was the last time you heard the expression “as safe as houses” at a dinner party? Probably not in the past six months as the credit crunch has squeezed the property sector. In fact there has already been a crash in the UK housebuilder index, which in 2007 experienced its worst annual performance for 20 years – plummeting 50%, almost as far as it did in the whole of the early 1990s recession, when it fell 60%.
Barratt Developments (Aim:BDEV)
But it should be remembered that the last downturn was exacerbated by high interest rates as the Treasury tried in vain to defend the pound against currency speculators and keep it within the Exchange Rate Mechanism. With interest rates unlikely to return to double-digit levels, is this the time to jump back into bricks and mortar?
Perhaps not for cautious investors – sentiment is still very weak with both house prices and transactional volumes set to fall in 2008. Yet for those with a sterner constitution and longer timeframes, there seems to be good value in this bombed-out sector.
Take Barratt Developments. Obviously, its profits are sensitive to the housing sector, but its share price has fallen by an incredible 70% from a high of 1,289p only 12 months ago. To me this looks over-sold on just about every key metric. First, Barratt is one of the three largest homebuilders in the UK, along with Taylor Wimpey and Persimmon. It has a large urban regeneration programme, with around 80% of its new homes being constructed on brownfield sites. The availability of affordable housing, especially in inner cities for lower income families and vital workers (teachers, doctors, etc), is a major plank in the Government’s policy to expand home ownership. As such, this segment should prove more resilient than the wider market.
Barratt also acquired Wilson Bowden in April 2007 for £2.1bn, and the integration project seems to be going according to plan, with cost savings of at least £30m in 2007/2008, rising to £60m the following year. As for the financials, joint broker UBS is forecasting earnings per share of 90p and 99p respectively for the next two years, putting the shares on miserly price/earnings ratios of only 2.9 and 3.4. Finally, the group has net tangible assets of around 570p a share, of which £3bn relates to its land bank, and it also has a strong forward order book of £1.8bn.
Clearly, there are risks, not least Barratt’s stretched balance sheet, where net debt is roughly £1.7bn, with interest payments covered four times. But with there still being a dearth of available land to support the increasing UK population, the stock rates as a speculative buy. And three directors think so as well; they topped up holdings in December at prices ranging between 441p and 446p. A half-year trading update is scheduled for Thursday 17 January 2008.
Recommendation: SPECULATIVE BUY at 333.5p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments