House-builders have had a troubled start to the year, like many London listed companies, with losses for the year to date now sitting at double digit figures for at least half of sector incumbents.
Despite the troubled economic and operating landscape, all of the companies featured in this piece have lauded a very successful 2015 year in recent days while reporting either half year or full year results.
Record breaking
Bovis Homes (LSE: BVS) was a trend-setter, with its management being the first to report during the week. The shares fell nearly 10% in the run up to the release, after undergoing a much steeper decline throughout the course of February.
Despite such market jitters, the group announced record-breaking legal completions of 3,944 homes, a 17% increase in revenues and a 14% increase in the full year dividend to 40p for the period, bringing the yield for the shares to 4.5%.
The shares currently trade at 9.4x 2015 earnings per share and 1.25x net assets per share. Both multiples are considerably lower than they were six to nine months ago, although it is the price/NAV multiple that should probably be of more interest to investors when it comes to house-builders.
Strong growth
Persimmon (LSE: PSN) was the next to report, with management detailing strong growth in completions, reservations, revenues, margins and earnings for the full year. Management also announced an additional capital return, to the tune of £866m, that that will see each investor receive a special dividend of 110p per share in April this year.
The shares now trade at 12.5x earnings per share for the 2015 period and 2.59x net assets per share, which is broadly in line with their position in H1 2015, although the group’s price/NAV multiple remains close to historical highs.
Raised dividend
Barratt Developments (LSE: BDEV) didn’t disappoint anybody today when it announced revenue growth of 19%, gross margin expansion to 18.6% and a disproportionately large 40% increase in operating profits during the first half of its financial year. Management also raised the interim dividend 25% higher, so that it now sits at 6p per share.
The shares currently trade at 10.7x the consensus estimate for earnings per share in 2016 and 2.05x net assets per share, the latter of which is modestly below what it was during much of 2015.
What do these numbers mean?
The UK’s house-builders are still turning a healthy profit and if we ignore the price/NAV side of valuations, it would seem that valuations still remain reasonable. However, price to earnings multiples mean little in the world of house-builders and with our sample group averaging nearly 2x NAV, valuations are close to historic highs.
Considering this, as well as the ongoing policy debate over house prices and the implications of such prices for mortgage eligibility and demand, it seems increasingly that the boom days where optimism drove ever higher share prices are beginning to dissipate.
My money is on management having seen the writing on the wall in this sense and this is why I believe that the majority of shareholder returns in future quarters will come from special distributions similar to those announced by Persimmon this week.
Therefore the question that investors should ask themselves is this — with average gains for share prices across the sector in excess of 100% over 2 ½ years, can any such distributions ever outweigh the potential downside now attached to the shares?
