Redrow Share Blog – Final Results Year Ended 2019

Redrow has now released its final results for the year ended 2019.

Revenues increased with a £191K growth in revenues from housing sales.  Cost of sales also increased to give a gross profit £35M higher.   Admin expenses were up so the operating profit increased by £29M.  There was a £2M reduction in loan interest but the share of profit from joint ventures decreased by £5M and tax charges were down £5M so the profit for the year came in at £329M, a growth of £21M year on year.

When compared to the end point of last year, total assets increased by £219M driven by a £136M growth in cash, a £104M increase in land for development and a £20M increase in trade receivables, partially offset by a £34M growth in payments on account and a £10M decrease in other receivables.  Total liabilities also grew during the year as a £25M decline in customer deposits was more than offset by a £75M increase in bank loans, a £51M growth in amounts due in respect of developed land and an £11M increase in trade payables.  The end result was a net tangible asset level of £1.583BN, a growth of £102M year on year.

Before movements in working capital, cash profits increased by £26M to £406M.  There was a cash outflow from working capital but this was less than last year and after tax and interest payments increased slightly the net cash from operations was £292M, a growth of £94M year on year.  The group spent just £4M on capex and received £1M in interest to give a free cash flow of £289M.  For some reason they took out £75M of new loans and they paid out £10M to buy their own shares and £218M to pay dividends to give a cash flow of £136M and a cash level of £204M at the year-end

The housing market continues to be affected by the uncertainty surrounding Brexit and the high cost of moving, particularly stamp duty.  During the year residential property transactions reduced and are running below historical levels.  House price inflation remains subdued.  The new homes market has been less affected and remains relatively resilient.  The group entered the coming year with an order book of £1.02BN, a decrease of £129M as a result of weaker trading towards the end of the first half of the year and lower volumes and selling prices in London.  The mortgage market remains competitive, however, and Help to Buy continues to support buyers of new homes. 

From April 2021, the Help to Buy scheme will only be available to first time buyers and regional price caps are to be introduced.  The scheme will end in March 2023.  The regional price caps will adversely affect the ability of first time buyers to acquire homes through the scheme in the more affluent areas of the north and midland and London will be least effected until 2023.  The group’s strategy to mitigate the impact of this is to attract more buyers from the secondary market to their Heritage Collection which offers the character and space considered by many to be absent from new homes. 

There was a 13% rise in completions to 6,443, driven by a 55% increase in social housing output which accounted for the average selling price falling by 2% to £324K.  The private average selling price increased by 2% to £389.5K due to geographic mix and a small element of house price inflation.  With overall house price inflation barely covering underlying cost increases the group have instigated a number of cost saving measures. 

During the year the group opened a new office in Oxford.  To reduce costs they are consolidating their East and West London divisions into one office based in Colindale, where in time, they will be building a new office to house all their London operations.  By making these changes they will be able to share a number of functions across the two businesses.  They are expanding the team at Harrow Estates who will now have a satellite operation in the Thames Valley office to focus on the larger sites in the south.  The expansion of Harrow will also assist the divisions on larger more complicated schemes and forward land.

During the year the group added 7,371 plots to the owned and contracted land holdings.  Of these, 2,909 were converted from forward land holdings.  After taking into account completions, their owned and contracted land holdings with planning increased by 936 plots to 28,566.  Their forward land holdings increased by a net 800 plots to 31,500.  The group are maintaining a cautious approach to land buying until there is more certainty around Brexit.  This more cautious approach combined with ongoing delays in the planning system is having an impact on the rate at which new outlets are coming on stream.  Their shift to acquiring and developing larger sites offering a wider range of product is helping mitigate this by delivering better rates of sale. 

The current land holdings in London continue to fall reflecting the board concerns over the market.  London is the most affected by the political uncertainty around Brexit and the end of Help to Buy in 2023.  They are particularly cautious about future investment and will continue to de-risk any investment through either PRS or partnership agreements. 

There were a number of relevant board changes.  Steve Morgan, who founded the business, has stepped down from the board.  After nine years, so did Debbie Hewitt.  Matthew Pratt was promoted to COO and John Tutte was made executive chairman. 

The board are cautious about the post-Brexit future and the eventual impact of the changes to the Help to Buy scheme.  Since the start of the New Year, trading has been encouraging and the demand for their new homes is strong with reservations running ahead of last year.  Notwithstanding the political and economic uncertainty, they are confident that 2020 will be a successful year for the group.

After a 9% increase in the full year dividend the shares are yielding 5.1% which increases to 5.3% on next year’s consensus forecast.  The net cash balance at the year-end was £124M, an increase of £63M over last year.  At the current share price the shares are trading on a PE ratio of 6.6 which increases slightly to 6.7 on next year’s forecast. 

On the 5th November it was announced that director Warren Thompson sold 19,328 shares at a value of £120K. 

Overall then there is no doubt that this has been another good year for the group with increased profits, net assets and operational cash flow, with plenty of free cash being generated.  The year has started well but there are clouds on the horizon with Brexit and the end of Help to Buy.  It seems that the group may be entering a period of no growth, possibly backed up by the director sale.  On the other hand, this is a sturdy company and this could already be priced in with a forward PE of 6.7 and yield of 5.3%.  I continue to hold for now.

On the 6th November the group released a trading update.  For the first 18 weeks off the year, trading has remained resilient despite ongoing Brexit uncertainty and relatively weak demand in the wider housing market.  The value of net private reservations in the period, excluding a £119.5M PRS sale at Colindale, was 2% ahead of last year at £598M.  Including that sale they were up 22%.  The average selling price of private reservations remained broadly the same at £389K. 

Outlet growth continues to be affected by planning delays and the cautious approach to land acquisition the group have adopted.  The combination of constrained outlet growth and the timing of block completions in London will result in revenue, profit and cash generation being considerably more weighted than usual to the second half of the year.  This, together with the strength of current trading has resulted in a record overall order book of £1.3BN, an 8% increase.

Net debt currently stands at £32M compared to net cash of £132M last year due to the £218M cash return to shareholders over the past year. 

The further uncertainty created by the general election and the impact this will have on the terms of Brexit leave the prospects for the housing market in an unpredictable stage but the group is well positioned to deliver with a strong forward order book.  The board are confident that provided trading conditions remain stable, the group is on course to achieve good results.


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