Anyone who was brave enough to invest in housebuilders in the darkest days of late 2008/early 2009 will be sitting on stupendous gains today.
Taylor Wimpey (LSE: TW), Barratt Developments (LSE: BDEV) and Persimmon (LSE: PSN), were all ejected from the FTSE 100 during the great bear market, as their shares went into freefall. Now, though, the trio are back in the top index, and their shares are trading at multi-year highs — record highs in Persimmon’s case.
But is there still value in these national housebuilding behemoths, which all have market caps of close to £6bn? Or do smaller operators, such as Telford Homes (LSE: TEF) and MJ Gleeson (LSE: GLE), which are valued in the £200m-£300m area, offer better prospects for investors today?
Niche players
Telford Homes operates exclusively in relatively affordable areas of inner London. The company (which announces its annual results on Wednesday) says demand exceeds supply, but that property prices within its niche have been increasing more modestly and sustainably than in the capital’s bubbly prime and super-prime areas.
The Board said in a trading update last month that it “expects significant growth in output and profits over the next few years and remains very confident in the long term prospects for Telford Homes”.
MJ Gleeson has two divisions: urban regeneration in the north, with a particular focus on low cost family homes, and strategic land promotion — enhancing the value of land through the planning process and selling it on to developers — mainly in the south.
Gleeson’s Board said in a trading update earlier this month that it “remains confident that there will be further substantial improvements in the Group’s trading performance in both the current year and beyond”.
Valuation
Smaller operators Telford and Gleeson appear successfully established in profitable niches, and very confident for the future. But how do their valuations look against the big FTSE 100 players?
The table below shows a number of valuation measures: price-to-book (P/B), based on net tangible assets at the most recent balance sheet date; price-to-earnings (P/E), based on forward 12-month estimates; and forward P/E-to-earnings growth (PEG). The figures in brackets rank the companies on each metric from 1 (best value) to 5 (poorest value), and the final column shows the sum for all three metrics.
| Share price | P/B | P/E | PEG | Ranking sum | |
| Telford | 489p | 2.7 (4) | 11.9 (=1) | 0.50 (=1) | (6) |
| Gleeson | 424p | 1.8 (1) | 13.5 (5) | 0.50 (=1) | (7) |
| Taylor Wimpey | 184p | 2.4 (3) | 11.9 (=1) | 0.54 (3) | (7) |
| Barratt | 595p | 2.3 (2) | 11.9 (=1) | 0.70 (4) | (7) |
| Persimmon | 1,936p | 3.0 (5) | 12.5 (4) | 0.78 (5) | (14) |
Persimmon stands out as poor value on these measures. Otherwise, it appears that the market is affording the smaller niche players a broadly similar valuation to the national giants.
The background for housebuilders remains benign, and the ratings in the table above suggest their shares could go higher yet. However, I’m not persuaded that the smaller operators have significantly more to offer at current valuations than the big players. Indeed, turning to the most concrete measure of shareholder value — cash returns — the bigger companies are leading the way, with programmes to distribute substantial sums of surplus cash to shareholders.
As such, I don’t see a compelling case to invest in the smaller companies in preference to their larger brethren, and, if I held shares in Taylor Wimpey or Barratt, I don’t think I’d be rushing to sell them to buy into Telford and Gleeson. What I would be doing, though, is dancing nearer the door as time goes on, because one thing you can be sure of is that housbuilders won’t boom forever.
