House-building shares are being demolished by the market today after the biggest of the lot, Taylor Wimpey, revealed that it hasn’t been able to raise new capital.
The house-builders are being demolished by the market today after one of the biggest, Taylor Wimpey (LSE: TW), revealed that it hadn’t been able to raise new capital.
As I write, Taylor Wimpey’s shares have tumbled by more than 50% today to 26p. A year ago they were trading at 377p!
So where does that leave Britain’s builders who are being deconstructed in sympathy? Are there any gems among the rubble?
Let’s have a quick glance at a few. I'm comparing the current market caps of the companies with their net asset values 'NAV' (net asset value; the sum of all a company's assets less all its liabilities). The restated NAV has been calculated by me after applying a severe 35% discount to the value of the company's inventory to reflect the current harsh market conditions.
Of course, these are very rough and ready figures, which take no account of countless other highly relevant factors affecting valuation, and none whatsoever of profitability -- and prices are constantly changing. But they do give one indication of overall value.
However, in the current climate 'survivability' has become an issue. Companies go bust because they have insufficient cash to repay debts and Taylor Wimpey has spooked the market today by saying it could breach its banking covenants. So it’s vital to pay close attention to cash-flow in the current climate where new finance is exceptionally hard to come across, almost regardless of net asset values it seems.
Nevertheless, some of these valuations could look ludicrous in a few years’ time, but which won’t be included in the line-up by then? It’s all about timing your entry when trying to catch a falling knife.
Not all builders are the same. Personally, I quite like a situation where a price has been knocked severely purely in sympathy with a “colleague” and on this basis, Bellway, Bovis, Redrow, Persimmon and Barratt look worthy of closer inspection – but only by brave investors prepared to lose their shirts. Of these, Bovis looks the best to me on a safety-first basis. Bovis has seen off previous housing slumps, though it may now be regretting its purchase of Elite Homes, and a site near Bristol last year. Bovis said in May that it has access to loan facilities of £220m which don’t mature until 2010. This may be crucial as now is clearly not the time to go looking for new funds.
For those of us who enjoy the thrill of a gamble with money we can afford to lose, the builders will certainly offer some excitement over the months ahead.
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