Private equity firms have been picking off the housebuilders since 2021 and Peel Hunt expects further consolidation over the next few years.
The broker notes there are now four housebuilders trading below their tangible net asset value (TNAV) based on its forecasts for the current year. The quartet comprises Crest Nicholson PLC (LSE:CRST), Bellway PLC (LSE:BWY), Redrow PLC (LSE:RDW) and Springfield Properties PLC (AIM:SPR). Of those, Crest is trading at the biggest discount (29%) to projected NTAV, followed by Bellway (25%), Redrow (18%) and Springfield (2%). The sector as a whole trades at 1.18 times the projected NTAV versus a 10-year average of 1.49.
Nearly all of the recent notable acquisitions have been done by private equity (PE) firms: Keepmoat, Avant, Miller, Kier Living, Hopkins, St Modwen, McCarthy & Stone and Urban & Civic.
Peel Hunt said it thinks it is possible there will be takeovers of the quoted companies but it does not believe mergers between any of the four big volume housebuilders are likely.
“However, we could see some of the majors invest in niche parts of the market to which they have no exposure. PE firms who have bid and failed to land one of the recent deals may well still be interested, while there is scope for the recent PE deals to be bulked up,” Peel Hunt speculated.
“Of the quoted companies those on the biggest discounts – Crest, Redrow and Bellway – look the most vulnerable to an unsolicited bid to us given the discounts to TNAV, although clearly Countryside needs to be added to this list given the operational issues, drop in share price and recently announced formal sale process,” it added.
Combining two mainstream housebuilders has typically delivered synergies of around 2.5-4.0% of sales from the acquired company, Peel Hunt calculates. These savings traditionally have come from a streamlined regional office set-up (with the removal of duplicate regions), some savings at the head office level as well as some benefits in terms of build costs accruing from greater buying power.
“While these synergies are clearly valuable, the role of land plots and value within the deal has often been a key swing factor, especially when there has been a period of considerable land price inflation or shortage. Hence, it is no coincidence that the 2005-07 period saw a spike in bigger deals, following a period when land price inflation had averaged c.20% per annum over the previous five years. In contrast, the land market has been very benign in the 2015-20 period, which has resulted in few corporate deals,” Peel Hunt said, before noting there has been a resurgence in land price inflation in recent months.
“Should the current cocktail of strong levels of demand, high land price inflation but low company valuation persist, then M&A [mergers & acquisitions] could present some attractive opportunities for management teams to acquire land for lower than its replacement cost, in our view,” Peel Hunt postulated.
The broker has “buy” ratings for Barratt Developments PLC (LSE:BDEV), Bellway PLC (LSE:BWY), Henry Boot PLC (LSE:BOOT), MJ Gleeson (LSE:GLE) PLC, Persimmon PLC (LSE:PSN), Redrow PLC (LSE:RDW), Taylor Wimpey PLC (LSE:TW.), Vistry Group PLC (LSE:VTY) and Watkin Jones PLC (AIM:WJG), and a more lukewarm “add” rating for Berkeley group PLC and Crest Nicholson PLC (LSE:CRST), despite the latter looking the most vulnerable to a takeover, according to Peel Hunt.
Countryside Properties, which is already in play, is rated as a “hold”.
“We have some sympathy with the view that the lumpy nature of some projects means growth may be better achieved as a private business or as part of a larger group, and would not be surprised to see further bidders emerge,” Peel Hunt said.