Hobson: Not All Housebuilder Stocks are Equal

THE WEEK: Morningstar columnist Rodney Hobson reflects on the housebuilder sector - and how fortunes are divided among the stocks

Rodney Hobson 19 October, 2018 | 9:13AM

Housebuilding housebuilder house home stocks UK equities

There’s always a danger in assuming that if most companies in a sector are doing well, all of them must be performing likewise. Crest Nicholson (CRST) is a clear example of being in the wrong place at the wrong time.

The housebuilding market is still thriving despite fears that Brexit will cause an outflow of people, upward pressure on wages for skilled workers and the tax assault on buy-to-let. Potential demand continues to outstrip supply.

Bellway (BWY) this week reported that in the year to 31 July it has sold more than 10,000 houses for the first time, and at a higher average selling price than before. Gross margins were squeezed a little, yet pre-tax profits were 14.3% higher. The dividend total is raised 17.2% but remains covered a conservative three times by earnings.

The balance sheet is strong, with net cash, and so is the order book. The good times will roll for another year.

It was a similar story at Barratt Developments (BDEV), in which I have a modest stake. Market conditions remain good, the AGM was told, and total forward sales in the 15 weeks to 14 October were up 12.4% on the same period last year.

There is no disputing that the best times for investing in housebuilders has long since gone and shares in the sector did rather run ahead of themselves. However, the correction has gone far enough in most cases.

Bellway shares have lost a quarter of their value over the past 12 months and are showing no real sign of recovery. Barratt is down from £7 to around £5.10 in the same period. In my view the fall has been overdone.

Not so at Crest Nicholson, although its shares have almost halved compared with a year ago. It is heavily committed to London and the South, where the market has come off the boil, especially for more expensive homes.

Sales have not picked up during the traditionally stronger early Autumn selling season and profits for the year to the end of this month will be £170 million to £190 million rather than topping £200 million. Measures to boost sales volumes have reduced margins below the previous guidance of 18%.

The shares have slid from 590p a year ago to around 310p. They could dip further.

Slide and ride

Figures from Merlin Entertainments (MERL) look a lot more fun as the disaster at Alton Towers fades into history and the terrorist attacks in London lose their impact. Revenue grew 4.7% in the 40 weeks to 6 October, including the key summer trading period of July and August.

Theme parks showed particularly strong trading, although that was in part down to favourable weather. Two new and very different brands have been launched: Peppa Pig World of Play in Shanghai and The Bear Grylls Adventure in Birmingham. Accommodation is attracting more custom and more rooms are being opened.

Chief executive Nick Varney remains sensibly cautious, claiming only that trading has been in line with expectations and admitting that some parts of the business are doing better than others. However, diversity can be a great hedge against a downturn in one sector, just as long as the overall business is making progress, as now appears to be the case with Merlin.

The shares peaked at 537p some 17 months ago but fell off a cliff this time last year when the prognosis was much worse than it is now. After staging a bit of a recovery they are on the slide again and I would hope they will find a floor at 320p as they did in February.

Given the recent past, Merlin is not an obvious must buy but for investors who like a bit of a punt they are worth looking at below 340p.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Barratt Developments PLC503.00 GBX-0.47-
Bellway PLC2,873.00 GBX-1.41-
Crest Nicholson Holdings PLC339.20 GBX-1.45-
Merlin Entertainments PLC333.00 GBX1.49-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.