Shares in quoted housebuilders have been heading south in recent weeks amid signs that the housebuilding boom may be tailing off. Last week’s mini-reporting season was promising enough, but there was some caution over builders such as Barratt Developments and Berkeley Group with exposure to the prime London market.
Then there have been sales of shares by key figures in the industry, including veterans such as Tony Pidgley at Berkeley and Steve Morgan at Redrow. Should other investors be doing the same?
There is much in the full-year figures from Linden Homes, part of Galliford Try, to suggest so. The long-term drivers for the new housing market — a chronic undersupply of homes, good mortgage availability and government subsidy through Help to Buy — are there for the foreseeable future. Linden’s sales per week per outlet were stable in the year to June 30, while completions were up by 7 per cent and revenues rose by 11 per cent.
The builder is only about 10 per cent-exposed to the London market and is in suburban zones rather than the overheated centre. It is still buying land that offers acceptable margins. Almost a quarter into the current financial year, there is no sign of any downturn.
The second division, partnerships and regeneration, is benefiting from the equal shortage of affordable housing and demand from local authorities and housing associations and will continue to grow. Galliford Try, though, is rare in offering a hybrid model, with a construction division that in good times provided support to earnings but which has had well-publicised problems with legacy contracts.
The company will be out of these next year, but exceptional losses of £98.3 million, flagged up in May, hit the figures, with pre-exceptional profits up 9 per cent but reduced to £58.7 million after the one-offs, against £135 million last time.
Galliford Try says that it is being more cautious about taking on new work, that it has a growing order book and is aiming towards a margin figure of 2 per cent by 2021. By then, Linden should be building 4,750 to 5,000 units a year, which suggests a growth rate of 5 per cent to 10 per cent a year.
The shares, off 23p at £13.40, have the support of a dividend yield well above 7 per cent and sell on eight times’ earnings. For investors, the big dividend yields available from most housebuilders remain the key factor.
MY ADVICE Buy
WHY There seems no reason why housebuilding should decline, while construction is back in relative health and the dividend yield is high
Just Group
We are promised they won’t change the name again. Just Group used to be known as JRP Group, which was created out of the April 2016 merger of Just Retirement and Partnership Assurance. The name was changed to the brand, Just, which offers bulk annuities to absolve employers from pension liabilities and retirement packages. A few months back the company was viewed as one in managed decline, or run-off, and the shares at around 120p reflected this.
Just is now firmly in growth mode. The company has written £260 million of bulk annuities since the June end of the first half of the financial year and was getting in new business in that period on margins of 8.9 per cent, against 5 per cent at the same point last year. Profits from new business in that half more than doubled to £64 million.
The cost savings from the merger are almost all through, Just has a new revolving credit facility of £200 million and the solvency capital ratio, reflecting available reserves, is comfortable at 150 per cent. The shares, unchanged at 160¾p, trade on a fair discount to the embedded value figure of 221p, the best measure of the worth of its assets. However, the share price advance since the spring does not suggest much upside.
MY ADVICE Avoid
WHY The shares look well up with events
Clinigen
Clinigen took it right to the wire in reaching an agreed deal to buy Quantum Group, another pharmaceuticals company quoted on Aim. Under Takeover Panel rules, the offer had to appear by close of play yesterday; it was announced first thing. The terms are right in line with those expected by the market and Clinigen is paying about 12 to 13 times’ earnings.
It is acquiring a business that is largely complementary and its management. There is no talk yet of synergies, but these are likely enough, in terms of saving of listing fees, cost-cutting at head office and putting Quantum’s product through Clinigen’s network.
This last is important. Two years ago Clinigen bought a business called Link, with the last payment now coming due, which has a network in the southern hemisphere for its existing drugs. Quantum makes “specials” — modifications to existing compounds for particular sufferers, mainly in the UK. This business is increasingly regulated so it makes sense to become part of a larger group.
It also has a UL2L business, taking unlicensed medicines and obtaining licences for them, and Link would prove useful in this. It is unusual to see a deal that makes so much sense internally. Clinigen’s £1.2 billion-plus market capitalisation makes it look a bit big for Aim, but the shares have been one of the success stories there, floating at 164p in 2012 and off 51p at £10.60 yesterday. They sell on about 25 times’ earnings; expensive and it might be tempting to take profits, but they warrant a long-term hold.
MY ADVICE Hold
WHY Shares are highly rated but deal is a good one
And finally . . .
Town Centre Securities offers a reasonable exposure to the regional property market, with less than 10 per cent of its portfolio by value in London and a wide range of assets. Its tenants include Wm Morrison, Waitrose and Leeds city council and it boasts a 99 per cent occupancy rate. The shares trade on a little more than 80 per cent of net asset value and there is a good pipeline of development properties in areas such as Leeds and Manchester. The well-covered dividend offers a forward yield of 4 per cent.
