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INSIDE THE CITY

Redrow cheer may raise the roof

The Sunday Times

After Berkeley Group chairman Tony Pidgley cashed in £50m of shares in the housebuilder last Monday, the share price dipped 2.5%. Yet when Redrow founder Steve Morgan sold a slice of his company for a similar sum two days later, the stock kept moving up.

Although Morgan, 67, is no longer running the FTSE 250 housebuilder — he retired in March — some in the City had felt his near-30% stake acted as a drag on the shares by reducing liquidity.

He found plenty of buyers. Next to its peers, Redrow looks cheap. The shares are changing hands at all-time high prices, but the company trades at a discount of about 25% to the sector on both earnings and net asset value — key metrics. On Friday, the shares closed at 732p, giving a market value of £2.6bn.

Redrow is the fourth-largest housebuilder by volume, putting up more than 6,400 homes in the year to June and posting £406m in pre-tax profits on £2.1bn of sales — the sixth consecutive year of record results.

Like other builders, its margins have been fattened by the Help to Buy scheme. However, they are also higher naturally because Morgan scrapped cheaper designs, amassed a strong land bank and focused on Redrow’s flagship Heritage range of family homes when he returned in 2009, nine years after retiring for the first time.

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While he was away, the company fell into crisis. He forced his way back in with the support of hedge fund Toscafund. After 10 years turning the builder around, he was succeeded as executive chairman by John Tutte, previously chief executive. Since April, the combined stake held by Morgan and his charitable foundation has fallen to 20%.

Tutte, 63, has had to weather storms about governance and pay, but has mostly carried on where Morgan left off. The shares are up 46% this year.

Jamie Fletcher, an analyst at research firm StockViews, has a bullish £12.50 price target. He expects margins of 20% to rise by 1.5 percentage points due to “unappreciated embedded value in the land bank”. While others say that is too optimistic — Fletcher’s assumptions need moderate house-price and build-cost inflation to come good — other factors suggest that Redrow is set fair.

Boris Johnson’s “stonking” majority has provided much-needed political certainty, and Tutte reckons a stamp duty cut may be on the cards. Then there is the prospect of buyers rushing into Help to Buy before the scheme is restricted to first-time buyers in April 2021. Buy.

@iamliamkelly

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