I wrote about Henry Boot (LSE: BOOT) in January last year and waxed lyrical about the full-year trading update the firm had just issued.
During 2017, around 48% of the firm’s operating profits came from property investment and development, which includes the firm’s housebuilding joint venture. Roughly 37% of operating profit derived from the company’s land promotion activities, which involves acquiring, promoting, developing and trading land. Henry Boot typically secures planning permissions on land, which adds value, and then sells it to builders and developers. The remaining 15% or so of operating profit came from construction activities.
Inherently cyclical operations
Henry Boot has several strings to its bow within the wider sector relating to real estate. I’d observe that all its activities carry a high degree of inherent cyclicality. But last year’s full-year results were blisteringly good. Indeed, I reported a year ago that earnings were “comfortably ahead of the board’s previous revised expectations.” I liked what I was seeing with Henry Boot and said: “The firm’s attractions are many, not least of which is the modest-looking valuation and a dividend that has risen almost 69% over the past five years.”
But at the end of January 2018, the share price began to slide and declined steadily all year. At the current 254p, it is down around 26%. Today’s full-year trading update reveals that the firm traded “in line with the Board’s expectations” in 2018, which is a less upbeat assessment than last year’s. However, a one-off pension provision pulled the results down a little, without which the firm would have “slightly exceeded expectations.”
A note of caution
However, the directors sounded a note of caution in the update. Trading conditions became “more challenging” during the year and they think that happened because the government’s negotiations with the European Union (EU) about the UK leaving the EU “served to increase the level of uncertainty within the UK real estate market.” The slowdown affected Henry Boot’s biggest profit-generating activity, the Property Investment and Development division. Prospective developments were delayed “by a combination of client uncertainty or planning delays.” Meanwhile, the draft full-year valuation of the investment property portfolio came in “broadly neutral.” Increases in the value of the logistics and industrial assets were offset by deficits in retail investments.
Trading well but I’m cautious
Despite the weakness from the Property Investment and Development division, the other divisions performed well and chief executive John Sutcliffe said in the update that, overall, he expects a good start to 2019, despite being “mindful of some uncertainty in the UK real estate market.”
However, I’m taking the warning shots from the property market seriously because I think the decline could gain traction during 2019. If that happens, Henry Boot’s real-estate-facing operations will suffer, which means the share-price decline could continue. I’m less optimistic about the immediate outlook for the firm than I was a year ago so would rather mitigate some of the cyclical and single-company risks by investing in an index tracker fund instead. Perhaps one that follows the fortunes of the FTSE 100 index or the FTSE 250 index.
