With strong forecasts, the UK's housebuilders are looking like great bargains now.
The best time to buy shares is when they're selling below their fundamental valuations, yes? Why, then, is the market studiously ignoring the FTSE's three bargain housebuilders?
It's surely because of sentiment. After all, the buy-to-let property boom is long gone, and house prices are going nowhere. And with the current state of the economy, far fewer people are rushing to climb the property ladder.
But what if I tell you that these three are sitting on assets that alone are worth more than their share prices, and that those assets are themselves undervalued? Wouldn't that make them worth buying?
Well, here's what a few fundamentals for Barratt Developments (LSE: BDEV), Bovis Homes (LSE: BVS) and Redrow (LSE: RDW) look like, based on their next two full-year forecasts:
|EPS % 2012||+187%||+49%||+59%|
|EPS % 2013||+57%||+44%||+29%|
(Bovis has a year-end of December, the other two June. Redrow figures allow for the rights issue just concluded.)
Lots of cheap land
Let's start at the bottom of the table and work upwards, looking at that asset value. With price-to-tangible-book (PT/B) values of significantly less than one, you're actually getting more assets for your money than you pay for the share price -- with the caution that asset accounting can be a tricky art.
A lot of that is accounted for by the building land that the three have built up over the past few years, while the slump was on and the brown stuff was going cheap. By the time of its half-year results time in February, Barratt had accumulated 4.6 years' worth of building plots based on its current rate of building, and rated much of it as "high margin", suggesting that it expects to make higher than average profits on the resale of the land once built on.
In March, Redrow told us that it was sitting on 4.7 years' worth of land and, in its annual results delivered the same month, Bovis Homes told us of further growth in its high-margin land bank, with the bulk of its plots in the more profitable south of England.
Talking of Bovis, the firm released an interim management statement today, ahead of its AGM, revealing better sales prices and higher margins, leading to stronger profitability. And that comes a week after Barratt told us it was enjoying its best spring in years.
Bovis reckons that the UK housing market is stable, and that its land purchase programme is already feeding through to higher margins, as its sales mix has moved towards more traditional homes in the south of the country.
Net reservations in the 19 weeks to May 11, at 783, were up 33% on the same period a year ago, after the company opened 23% more active sales outlets. And by that date, Bovis held a total of 1,013 reservations for legal completion in 2012.
Mortgage availability is still a problem for the housing market, but Bovis reported that the government backed NewBuy mortgage scheme, which requires a 5% deposit, is showing early signs of success.
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But lets get back to that table above. All three have very strong forecasts for this year and next, so even without that large asset base, the prospects for rising earnings looks very good. They are all on price-to-earnings (P/E) ratios of around the market average for 2012, but if earnings come in close to forecasts, that will fall significantly for 2013, with all three on prospective P/E ratios of 10-12.
They are all on pretty low PEG valuations too. The PEG, which relates a share's P/E to its expected earnings growth over the same period, is largely used by growth investors (having historically been associated with Jim Slater). But it can be a useful indicator for recovery shares, too -- and a low value (traditionally less than 0.7) is often taken as an indicator of undervaluation.
Dividends low, but coming back
The only downside I see in these companies is their very low dividends. When business was stronger, all were offering decent payouts of around the 4-5% range, but they were stopped during the crisis.
Now they're starting to creep back, though they'll still only be scraping 2% by 2013, and you're not going to get a good income from that. But the bottom of the market has well passed, all three companies are strongly positioned to do well over the next five years, and the only direction I can see for dividends now is up.
So, on the basis of every factor mentioned above, all three builders are strong buys to me.
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> Alan does not own any shares mentioned in this article.