I think the housebuilding sector is a great place to go shopping for dirt-cheap UK shares after the stock market crash. The following two dirt-cheap stocks should offer both long-term growth and income, which you can take tax free inside a Stocks and Shares ISA.
FTSE 250-listed Vistry Group (LSE: VTY), formerly Bovis Homes Group, trades at a low valuation of just 5.2 times forward earnings. No UK housebuilding share is cheaper today.
A dirt-cheap UK share I’d buy
Vistry has had a tough 2020, its share price falling by half since the start of the year. The March lockdown hammered the housebuilding sector, with sites closed and the sales market mothballed. Vistry saw first-half completions plunge from 3,371 to just 1,234, as revenue from housebuilding activities crashed from £854m to £344m.
Management has flagged up a stronger second half, with strong forward sales as pent-up demand for housing was unleashed. It has cut jobs, found synergies and suspended the dividend. This allowed management to shrink net debt from £476m in May, to £357.3m on 30 June.
Vistry still expects to make full-year profit before tax of between £130m and £140m in 2020. So why is this UK share so cheap? One reason may be that operating margins are lower than the housebuilder average, at 16% in 2019. This compares to 20.9% for the sector as a whole, according to figures from wealth platform AJ Bell. It still doesn’t pay a dividend, but management has promised one for 2021 with a progressive policy thereafter. Analysts predict Vistry will yield 4.9% next year, covered 3.88 times earnings.
Vistry has underperformed the housebuilder sector this year, and I’m hoping that buying at today’s low price could reward me handsomely when it plays catch-up.
Another top dividend and growth stock
Fellow FTSE 250 housebuilder Redrow (LSE: RDW) is the next cheapest major UK housebuilder share, trading at a dirt-cheap forward valuation of 7.4 times earnings. It also suspended its dividend but is expected to yield 4.1% next year, with plentiful cover.
Redrow enjoyed steady profit margins of 18.3% last year. Earnings looks set to be flat this year, but analysts predict that they will jump 73% next year. Naturally, that depends on the pandemic, but at least the government is keeping the housing market open in lockdown 2.0.
Management is looking forward to a stronger second half of the year, as it shifts its focus from London to its higher returning regional businesses, and higher-spec ‘Heritage’ range of period-style arts and crafts homes.
Today’s property market is underpinned by the government, through the stamp duty holiday and help to buy. There may well be further support to come, this time targeted at first-time buyers. This should help to keep sales ticking over, while extended mortgage holidays and furlough support should help to prevent repossessions.
I’m looking to buy dirt-cheap UK shares like these two before the recovery, rather than afterwards when they’ll be more expensive. I’m hoping that will boost my chances of building a big enough portfolio to retire early, if that’s what I want to do.
