Redrow plc (LON:RDW) bumped up its interim dividend by 50% after completing a record number of homes in the first half of the financial year.
The pay-out was hiked to 9p from 6p the year before on the back of 26% increase in profit before tax.
READ: Redrow and Cairn Homes under the cosh as founders reduce stakes in the housebuilders
Profit before tax in the six months to December 31 rose to £176mln from £140mln the year before on revenue that rose 14% to £890mln from £739mln in the corresponding period of 2016.
Broker Liberum Capital had predicted sales of £862mln and profit before tax of £163mln.
Legal completions in the period rose 14% to 2,811 from 2,459 the year before, which was ahead of Liberum's forecast of 2,750 units.
The average selling price rose to £330,000 from £303,000 the year before, which was well ahead of Liberum's forecast of £311,000, largely as a result of the growth of Redrow's operations in the south of England.
Net debt at the end of December 2017 was £35mln, down from £73mln at the start of the reporting period, giving gearing of 3%.
Redrow said it expects only a modest rise in our net debt position in the second half of the financial year.
READ: Redrow says demand for homes remains strong despite Brexit as it reports record 2017 results
Demand for new homes remains robust with good availability of mortgages at competitive rates, the company's chairman, Steve Morgan, said.
“This, together with the Government's commitment to increase the supply of new homes, provides us with the confidence to continue our strategy to grow the business,” he said, adding that in the first half of the financial year just under 40% of private reservations took advantage of the 'Help to Buy' scheme.
“We entered the second half of the current year with an order book comfortably in excess of £1bn. Reservations in the first five weeks have been in line with the strong comparable period last year. Given the strength of both our order book and land holdings, together with the robust sales market, our growth strategy remains on track. This gives me every confidence it will be another year of significant progress for Redrow,” Morgan said.
Analyst comment
Henry Croft, a research analyst at Accendo Markets, said the record-breaking performance comes against a continued back-drop of Brexit uncertainty for UK house-builders, and is at odds with a number of peers who failed to see generally positive results releases be rewarded with an accompanying share price reaction.
“Given Redrow’s smaller position in the market compared with bigger brothers Barratt Developments, Persimmon and Taylor Wimpey, the company can afford to bolster growth through increasing completions and stands out as one of the only house-builders consistently improving this metric by double digits,” Croft said.
“Crucially, however, is whether this improvement in completions can be maintained after the UK’s departure from the EU without adversely impacting prices and margins, and whether the sector can weather the threat of reduced labour and demand that comes along with Brexit. How the sector navigates the key headwind following the negotiating intermission and the second half of the Brexit theatrical performance will therefore be key. Will they drastically increase volumes and hope demand doesn’t take a hit after Brexit? Or stay steady as she goes, maintain the course and hope slower supply increase will filter through into prices?” the analyst wondered.
Numis Securities responded to the half-year results by upgrading its current year and next year estimates by 3% and 1% respectively.
Bearing in mind the recent fall in the share price it has upgraded the stock from 'add' to 'buy', although the price target remains unchanged at 729p.
The broker said the company's past investment in land and work in progress (WIP), rather than returning large amount of capital to shareholders, is feeding through to strong levels of volume and profit growth.
"The main driver of the strong results was a 14% rise in volumes, which has been supported by the strong order book at the start of the year and also sales outlets rising from 122 to 127 – with a further rise expected in H2. The order book at the end of December was up 5% at £1.05bn (a record for the group – and shows growth from the 3% reported in November 2017), giving a good underpinning to our full year forecasts. Reservations in H1 2018 were 10% ahead by value and reservations so far in 2018 are in line with the strong comparative from last year – although due to the higher outlet position it implies a small decline in the sales rate (from c.0.73 to 0.71x)," Numis said.
Liberum reckoned the statement should be well received for the sector generally, and reiterated its view that the stock looks cheap compared to its peers.
“Redrow’s shares trade at an almost 20% PER [price/earnings ratio] discount to the sector, which we believe makes the shares attractive,” the broker said.
“We continue to prefer the growers to the returners in an environment in which margin progression will get more difficult. Redrow has the foundations in place to deliver sector-leading volume growth,” the broker continued.
“Since 2012, its land bank has doubled in size, five new regional offices have opened, and management has built a strong track record of unit and profit growth. Margins should be sustained at high levels with higher operational gearing and limited competition for land offsetting rising build costs and slowing house price inflation,” Liberum said/
The broker has a target price of 730p for Redrow; the shares were up 15.5p at 609p in early deals.
--- adds broker comment and share price reaction ---