Following the rather unexpected result of the General Election, investors saw the market rally, closing up by over 2% on the day. One of the best performing sectors was the housebuilders, some of which saw their share price rise by over 10% on the day, with the clouds of political interference in the form of a potential mansion tax amongst other proposed measures by other political parties seeming to subside as it became clear that a Conservative party had a won a majority.
With the political landscape now offering favourable conditions for another five years, I’ll be taking a look at four housebuilders, two of which — Berkeley Group (LSE: BKG) and Persimmon (LSE: PSN) — will be familiar, whilst Telford Homes (LSE: TEF) and Inland Homes (LSE: INL) are quite a few rungs down the housing ladder, so to speak. Let’s take a look…
The Big Boys…
Capitalised at over £5 billion and nearly £4 billion respectively, both Persimmon and Berkeley Group are sizable enterprises.
Persimmon operates in approximately 400 locations. The company controls land that has potential for development but requires further promotion or investment in order for this potential to be realised. It owns 16,300 acres, 74,407 plots and 175 construction sites. It operates across the country and is one of the largest listed housebuilders. A key attraction here is the current capital return plan: the company has promised to return £6.20 per share to shareholders. To date they have paid £2.40 per share, and with a minimum of 10 pence promised for 2016, they are already ahead of schedule.
Not to be outdone, Berkley Group has made a similar promise, the company plans to pay shareholders £13 per share by 2021 in three tranches. There is 90 pence left to pay this year, and £8.66 by 2021. Whilst this will be dependent on market conditions, in a similar style to Persimmon, I wouldn’t be surprised to see a couple of special dividends thrown in, too.
A quick look at the chart tells the story – both shares have outperformed the FTSE 100 over the last 12 months.
Despite this outperformance, both shares still trade on undemanding forward P/E ratios, and yield more than double that currently forecast for the market as a whole.
Both capitalised at less than £300 million, Telford Homes and Inland Homes are off most investors’ radars — but in the long run this can be an advantage, allowing savvy investors to build a position before the market wakes up to a share’s potential. As you can see from the below chart, both of these shares have beaten both the FTSE 100 and their big brothers over the last 12 months.
Inland Homes is a housebuilder and brownfield developer company. The company, along with its subsidiaries, is engaged in acquiring residential and mixed-use sites, and seeking planning consent for development. In addition, the company is a developer of urban regeneration projects around southern England, with a particular emphasis on residentially led mixed-use schemes on brownfield sites. It is engaged in land-regeneration business, focused on developing sites in southern England for residential and mixed-use projects. It’s nice to see this sort of diversification in a small company.
At the interim results presented on 31st March, the company reported that profit before tax had surged over 60% and declared a maiden interim dividend – this, together with an optimistic outlook, gives me confidence that they will at least meet expectations. However, with a favourable tailwind, I wouldn’t be surprised to see market expectations beaten.
Like Berkeley Group, Telford Homes is also engaged in property development in and around London. The company’s projects include Avant-garde E1, The Boatyard E14, Cityscape E1, Hackney Square E9, Horizons E14, Lime Quay E 14, Parkside Quarter E14, Parliament House SE1, Stratford Central E 15, Stratford Plaza E 15, Stratosphere E 15 and Vibe E8.
When the company last reported in its April IMS, it was clear that everything was on track, with demand outstripping supply and an expectation that profits would exceed expectations. Even so, the shares still change hands for less than 12 times earnings and yield nearly 3%
Is Bigger Better?
It is true to say that the larger two housebuilders offer some protection against a downturn, as well as market-trouncing yields. However, I think that the smaller two offer investors an exciting potential… they are clearly growing quickly and boast better price to earnings growth rates (PEG) to their larger cousins – in my view, both are worthy of some further research.
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Dave Sullivan owns shares in Persimmon and Berkeley Group Holdings. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.