The Redrow (LSE:RDW) share price has remained stable despite huge challenges in the housing market. Having eked out modest gains in the year to date, the FTSE 250 stock rose a further 4% on Wednesday after the release of full-year financials.
At 491.8p per share, the company still offers solid value for money. They trade on a forward price-to-earnings (P/E) ratio of 11.8 times. What’s more, they offer a decent 2.9% dividend yield.
But given ongoing uncertainty surrounding future newbuild demand, should value investors like me consider buying Redrow shares?
Not bad at all!
To its credit, Redrow’s trading peformance has remained largely solid given the broader carnage caused by 14 straight Bank of England (BoE) interest rate hikes.
With affordability issues hampering broader buyer demand, completions at the company dropped 5% during the 12 months to June. Revenues meanwhile, slipped fractionally to £2.13bn from £2.14bn a year earlier. This is a far better performance than many other housebuilders have recently recorded.
Full-year turnover was supported by solid pricing across its portfolio. Average prices of its private properties and affordable homes increased 8% and 5% respectively, thanks to house price inflation and a favourable product mix.
Underlying pre-tax profit dropped 4% in fiscal 2023 to £395m, as high build inflation also squeezed the bottom line. The company cut the full-year dividend to 20p per share from 22p previously.
Choppy waters ahead
The trouble for investors is that things look set to get a lot more turbulent at Redrow. A total order book of £850m as of June — down 41% from a year earlier — underlines the strain housebuilders face to keep growing profits in the current landscape.
The business also warned it expects revenues for the current 12-month period to drop to between £1.65bn and £1.7bn. Pre-tax profits are expected in a £180m-£200m range, while the full-year dividend is tipped to drop again, to 14p per share.
However, these figures are based on the full-year sales rate matching the previous year’s 0.46 per outlet per week. This could be a tough ask, in my opinion.
Should I buy Redrow shares?
Firstly, the BoE is tipped to continue raising rates in the near term. At least another 0.25% increase is expected by the market to take the borrowing benchmark to 5.5%.
A steady stream of rate hikes is really starting to hammer homes demand in the UK. Both Halifax and Nationwide say that average property prices in August slumped at their sharpest rate since 2009. If inflation remains stubbornly high — a very possible scenario, in my opinion — then further policy tightening can be expected.
Rising unemployment is another concern after news on Tuesday that the jobless rate rose to 4.3% in July. It prompted Martin Beck, chief economic advisor at EY Club, has said that the jobs market is “clearly on the turn”. Data on Wednesday also showed the British economy contract by a larger-than-expected 0.5% year on year in July.
But the long-term outlook for builders like Redrow remains encouraging. As Britain’s population grows, demand for newbuild properties should steadily rise over time. Still, the threat of a housing market meltdown in the nearer term means I’d rather buy other UK shares today.