By Wednesday’s close, Redrow (LSE: RDW) shares were down 11% over 12 months. But they’ve been picking up since October. They remained fairly steady early Thursday, after first-half results showed optimism.
Compared to others in the housebuilding business, Redrow shares have done well. Barratt Developments has fallen 25% over the same period. And Persimmon is down a whopping 38%.
The likely effects of recession, and pressure on house prices, is starting to show through in forecasts. We’re looking at a forward price-to-earnings (P/E) multiple of a low 6.4, going by Redrow’s guidance for the year ending June. But forecasts see it rising close to 13, based on a predicted earnings drop in 2024.
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The dividend yield would dip to around 3.5% if analysts are correct. On the current share price, the 2022 dividend yielded 5.8%. The company has only just completed a £100m share buyback in January, so the cash situation still looks reasonably healthy. Maybe those forecasts are a bit too pessimistic?
First half
In the six months to 1 January, revenue dropped a modest 2% to £1,031m. Profit before tax held up fairly well, declining just 2.5% to £198m. The fall in bottom line earnings per share was bigger though, down 5.6% to 45.4p.
Considering inflation and interest rates climbed during the half, the outcome looks generally positive. But the impact on mortgage costs won’t be felt immediately, and it will surely take time to feed through to sales and revenues.
On that score, Redrow’s total order book fell by 27% from the same stage a year previously, to £1.1bn. I see that as a more serious indication of what might be to come. So maybe those forecasts aren’t too far off the mark after all.
Cash
Cash is the key to managing a downturn. At 1 January, Redrow had net cash of £107m on the balance sheet, £135m less than a year ago. But it includes the effect of that £100m share buyback, completed just after the period ended.
The board has maintained the interim dividend at 10p per share, which suggests confidence in the cash situation. For the full year, it’s now predicting 28p per share. That’s not far behind last year’s 32p, and would yield 5.2% on today’s share price.
Outlook
Chief executive Matthew Pratt said that, for 2023, “early indications are better than anticipated and the market appears to be finding a new, natural level.”
Redrow dropped its full-year revenue guidance a little, from £2.1bn to £2.05bn. But it upped its operating margin prediction slightly, to between 18% and 18.5%. The first half margin was stronger, at 19.3%
While the 2023 outlook appears reasonably bullish, the full effects of the housing downturn might not be felt until next year.
Verdict
The medium-term outlook for Redrow shares is uncertain, but the second half has started out strongly with reservations up. Still, I wouldn’t be surprised to see the shares lose some of their recent gains in the coming months.
But I think Redrow could be a good long-term buy for investors who understand the sector.
