Morning Equity Briefing
Redrow plc
(RDW LN)
FY results well ahead; outlook remains uncertain
Robert Gardiner
| Closing Price: | 130p | Rating: | Underperform | 15/09/09 | Previous: | Neutral | 13/08/09 |
FACTS: Redrow has reported (September 9th) results for the year ended June 2010 which are significantly better than both Davy and consensus estimates. The group reported a pre-tax profit of £0.7m versus a Davy estimate of a loss of £9.2m (consensus: -£7.2m). Group sales were £396.9m versus the Davy estimate of £378.9m and consensus of £373.8m.
ANALYSIS: In the FY, the group sold 2,587 homes (+22.4% year-on-year) at an average sales price of £149,300 (+8.7% yoy). The operating margin improved sharply from H1 (-0.9%) to H2 (6.8%) as a result of mix changes and higher volumes and prices. The group is having considerable success with the roll-out of the New Heritage Collection where the selling price during the year was £180,000 — some 15% higher than the group's previous product range. This product now features in over 30% of Redrow's outlets. While only 67 completions came from this product last year, this will rise to 40% of sales in the year ending June 2011. Forward sales are strong, up 18% yoy at £106m. Cancellations remained broadly static through the year at 17%, driven by the 'chronic shortage of suitable mortgage product' as well as down valuations. This situation has improved slightly in recent months. With the proceeds of the £150m rights issue, net debt fell from £214.6m at end-June 2009 to £47.1m at year-end. Net debt was significantly better than previous management guidance (£50-100m) and our own year-end estimate of £86m. Cash generated from operations was £50m. In the land market, the group acquired 3,281 plots across 31 sites, bringing the year-end land-bank to 13,170 plots. Management reports that the length of time taken to obtain planning permission has become the principal obstacle to the adequate supply of new homes in the UK. Current planning is described as being in a 'state of limbo' given expected planning system changes. In terms of outlook, the market has seen a reduction in transactions since the election as a result of economic uncertainty and the lack of available mortgage finance. Redrow has seen a small reduction in reservations in the ten weeks since year-end which has been offset by a mix-related increase in selling prices. Overall like-for-like sales year-to-date are marginally ahead of the same period last year.
DAVY VIEW: The results are significantly better than our forecasts while the outlook is clearly less certain given a slowdown since end-June, continued financing issues and problems with obtaining planning permission. The operational performance is improving sharply, showing the influence of Steve Morgan on the business. We have long regarded Redrow as one of the weaker operators in the sector, a view which is no longer justified. We will likely upgrade both our earnings forecasts and stock rating following a call with management later this morning.