The rising cost of materials is something investors in housebuilding shares need to keep a close eye on. Personally speaking however, these pressures aren’t denting my fondness for these sort of cheap stocks.
Latest financials from Redrow (LSE: RDW) illustrate how — for the time being at least — the housebuilders remain well-placed to absorb these costs and to continue generating decent profits
In its half-year update, Redrow said today that “house price inflation continues to exceed build cost inflation”. In fact homes are rising at such breakneck pace that margins have returned to pre-pandemic levels a full year ahead of Redrow’s expectations. Operating margins increased 2.4% year-on-year during the 27 weeks to 2 January, it said, to 19.5%.
Redrow’s revenues meanwhile clocked in at a first-half record of £1.05bn, up £11m from the same 2021 period. And pre-tax profits leapt £29m year-on-year to £203m. The strong result has prompted Redrow to hike the interim dividend to 10p per share, from 6p last year.
2024 forecasts raised
Pleasingly, it seems as if the party isn’t over for Redrow either. The builder’s order book stood at a whopping £1.5bn as of 2 January, up £200m from the same point in 2021. In addition, the value of Redrow’s product has also continued to rise rapidly since the start of the second half.
The value of private reservations per outlet per week averaged £417,000 in the five weeks to 6 February (or £367,000, excluding a bulk deal in London), it said. This was up considerably from the average value of £301,000 registered a year ago.
As a long-term investor, I always look beyond the short-term when considering which UK shares to buy. So I’m pleased to hear that Redrow has hiked its forecasts for the financial year after next (ending June 2024) today too. The housebuilder expects to generate revenues of £2.3bn-£2.4bn then, up from a previous forecast of above £2.2bn.
Returning to my point at the top of the piece, Redrow also expects house price inflation to continue outpacing build cost inflation. It has thus lifted its operating margin estimate to between 19.5% and 20% from around 19.5% previously. This has led Redrow to lift its earnings per share forecasts as well, to 92p per share, from 90p.
A cheap stock with 5% yields!
I expect housebuilding shares to remain a lucrative asset class for years to come. It’s why I already own FTSE 100 shares Barratt and Taylor Wimpey in my portfolio today.
I’m expecting demand to continue exceeding homes supply as interest rates should still remain well below their historical norms. New buyer incentive programmes should also continue to help first-time buyers continue to get their foot on the property ladder when Help to Buy ends next year.
I’m thinking of buying Redrow too, given the exceptional value it currently offers. This cheap UK share trades on a forward P/E ratio of 6.9 times. It also carries a large 5% dividend yield.
However, the problem of rising costs isn’t likely to go away soon. And its one I’ll continue to monitor closely. But all things considered, I think the likes of Redrow should continue to deliver delicious shareholder returns.