Telford takeover bid raises issue of whether house builders represent value or not

Russ Mould
3 July 2019

“Concerns over consumer sentiment, Brexit, affordability, cost inflation governance and – in certain cases – product quality mean that shares in the leading quoted house builders are struggling to make progress but someone clearly thinks that there is value to be had from an investment in the industry, judging by today’s bid for Telford Homes from American real estate giant CBRE,” says Russ Mould, AJ Bell Investment Director.

 

Share price change over last 12 months

Barratt Developments

18.7%

Berkeley Homes

3.2%

Redrow

1.2%

Bellway

(3.0%)

Crest Nicholson

(7.1%)

Bovis

 (7.7%)

Taylor Wimpey

 (7.7%)

Telford Homes

(8.6%)

Countryside Properties

(12.4%)

Persimmon

(20.1%)

 

 

FTSE All-Share

(0.6%)

Source: Refinitiv data

“Most of the builders’ share prices are getting a lift today on the back of this bid, which comes seemingly irrespective of concerns about Brexit and what it may mean for the wider UK economy and sterling – potentially an encouraging sign for the UK stock market more generally as it moves to an 11-month high.

“However, the valuation implied by the 350p-a-share cash offer, which puts a £267 million price tag on Telford, does not necessarily provide as much succour to investors in builders as they might hope.

 

2019E

2019E

2019E

Historic

 

PE (x)

Dividend yield (%)

Dividend cover (x)

Price/NAV(x)

Persimmon

6.9 x

12.1%

1.20 x

1.90 x

Berkeley Homes

11.5 x

4.8%

1.80 x

1.62 x

Countryside Properties

7.4 x

4.8%

2.86 x

1.62 x

Taylor Wimpey

7.9 x

11.4%

1.11 x

1.61 x

Redrow

6.3 x

9.6%

1.65 x

1.33 x

Bovis

9.5 x

10.0%

1.05 x

1.30 x

Barratt Developments

7.9 x

8.2%

1.54 x

1.26 x

Bellway

6.2 x

5.4%

2.97 x

1.26 x

Crest Nicholson

7.4 x

9.1%

1.48 x

1.08 x

Telford Homes

13.6 x

4.8%

1.53 x

1.06 x

 

 

 

 

 

AVERAGE

8.5 x

8.0%

1.72 x

1.40 x

Source: Sharecast, consensus analysts’ forecasts, Refinitiv data, company accounts for historic net asset value per share figures

“Granted, the bid for Telford, which develops sites in non-prime areas of London whose current projects cover postcodes such as E14, E15, E16, E3 and UB6, values the company on just under 14 times forward earnings. That is a premium to every FTSE 100 and FTSE 250 builder and the sector average of barely 9 times, but this may reflect how Telford’s earnings per share for the year to March 2020 are forecast to reach 26p, compared to nearly 50p two years ago, thanks to a shift in mix towards build-to-rent. 

“As such, the lofty multiple reflects the depressed nature of profits. In addition, the CBRE offer represents a multiple of just 1.06 time historic net asset value per share (333p at Telford), the lowest rating afforded to any of the quoted builders and below the sector average of 1.40 times. This may reflect Telford’s relatively modest size and the mix of its business but it does not imply a huge amount of upside for the other builders if that valuation is taken at face value.

“The good news is that there has been a bid at all. It suggests that CBRE firmly buys into Telford’s strategic thesis that demand for good-quality rental properties in London continues to outstrip supply and it could turn out that the bidder is getting a bargain, so at least the valuation could put a floor under a sector where share prices have largely lost their way of late, despite record profits and fat dividend yields.”

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