Should you Invest in this Housebuilding Stock - Redrow PLC?

Redrow PLC

Redrow PLC (LON: RDW) is an FTSE 250 listed residential property developer, which operates through 14 operational divisions across the United Kingdom.  

The interim dividend, with a record date of 25 February 2022, is scheduled for payment on 8 April 2022.  

Investment Rationale – Buy at GBX 522.40

• Financial Growth: During H1 FY22, Redrow demonstrated significant growth in revenue, profit before tax, and earnings per share. Subsequently, the interim dividend was also increased by 4 pence per share to 10 pence per share for H1 FY22.
• Growth Catalysts: Strong private reservations, improved order book, 5-star customer recommend score across all divisions, further progress in land markets, solid house market fundamentals, and introduction of the Residential Property Developer Tax holds potential for further progress in H2 FY22.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Earnings, and Price/Book valuation multiples of RDW are undervalued against the median of the Homebuilding & Construction Supplies industry.
• Positive Technical Indicator: The stock price is close to the lower Bollinger Band, while the 14-day RSI (~38.05) is confirming the oversold position.

Key Risks

• Disruption in the Supply Chain: The failure of a key supplier to meet its contractual obligations could potentially result in some short to medium-term price increases and other short-term delays and disruptions to the Group’s projects and operations.
• Record UK Inflation: British inflation hit a 30-year high of around 6.2% in February 2022, which may cause a further interest rate hike.

Interim Results (for 27 weeks to January 2022, as of 10 February 2022)

 (Source: Company Website)

• Top-line Growth: RDW reported a record revenue of £1,052 million in H1 FY22 (H1 FY21: £1,041 million) as house price inflation continued to beat the cost inflation.
• Margin Improvement: The operating margin improved to a normalised level of 19.5% in H1 FY22, ahead of previous guidance.
• Strong Balance Sheet: It ended H1 FY22 with net cash of £242 million (June 2021: £238 million).

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E)

*Peers: Bellway PLC, Barratt Developments PLC, and Crest Nicholson Holdings PLC.

*All selected peers are LSE-listed Companies from the UK Construction sector.

Conclusion

On the back of house price inflation and eps increase following the introduction of the Residential Property Developer Tax, Redrow has upgraded the FY24 guidance.

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the financial growth, positive industry dynamics, solid net cash position, increased order book and support from the valuation as done using the above method, we have given a “Buy” recommendation on Redrow PLC at the closing market price of GBX 522.40 (as of 29 March 2022), with lower-double digit upside potential based on 6.51x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’ 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.