Tracking a Potential Housing Recession in UK

29th Oct '17 by pone

13 comments 3332 reads

Safestyle and its peer group are down on concerns that demand in the UK home market is weakening. What is the best way to track this demand overall, week to week?

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13 comments

Logic

30th Oct '17

I think trying to track demand for housing is rather difficult. There are a lot of data that you can draw on to make your own assumptions such as;

- Average house prices (may want to look at this by region or london/rest of UK split)
- Time before average property is sold
- Order backlogs for house builders
- Interest rates
- Availability of mortgages and government support programs

The problem is that it is not quite a free market. The issue is very important politically and thus we have programs such as ~~"help to take on debt"~~ "help to buy", which skews the market and (in my opinion at least) has prevented market corrections.

Any attempt to decide where the housing market is headed would have to make assumptions on whether the government will or will not intervene.

pone

31st Oct '17

So we don't really want to track housing. As you point out, the primary market for housing is distorted by incentives. Moreover, I would expect the homebuilders to be the very last ones to know they are in a recession. They have long planning and building cycles. They can't turn on a dime.

What I really want to track are the after-market products for home improvement. Is there a symbol that tracks Safestyle's direct peer group? Would there be other ways to get at demand in that market?

herbie47

31st Oct '17

I think housebuilders will know pretty quickly as demand (sales) for their houses will fall and then they will probably put everything on ice, I remember the last recession around 2008, many houses were just left half built. Safestyle UK (LON:SFE) primarily fits replacement windows and doors to existing houses not supply new builds as far as I know. Epwin (LON:EPWN) is more in that line, Entu (UK) (LON:ENTU) has gone bust.

Several home improvement companies seem to be struggling at the moment, Topps Tiles (LON:TPT) is one. Probably best to do a watchlist of these companies. Sector is: https://www.stockopedia.com/sectors/homebuilding-construction-supplies-532030/

I like the charts on here, its a quick way to see how shares are performing: https://www.stockopedia.com/se...

pone

31st Oct '17

The sales cycle for a window replacement is weeks, not months or years. So if consumers stop buying you know immediately.

A homebuilder has a long planning cycle. They start a project with the idea that they will keep building for years. The sales cycle for a buyer may be three months. Moreover, there are distortions of demand due to various government interventions, incentives, etc.

As a result, the after market for home products feels declines in demand almost immediately, whereas homebuilders may get a blunted view of the decline and they may be the last to realize what is happening.

You see something similar to this in the chip business, where companies that sell end products to consumers see declines in demand immediately. Vendors who sell capital equipment and items with long-lived sales cycles are often claiming to see blockbuster demand for months after all of the companies selling end products are in steep declines.

In any case, you gave some good comparables, and I'll watch those.

My feeling is that Safestyle has very little liquidity risk, even in a multi-year extremely deep recession. Am I reading that balance sheet incorrectly?

herbie47

31st Oct '17

I understand your points but don't entirely agree with them. Also you are talking about different markets, new housebuyers I suspect are younger persons and in work, many home improvements are done by people who have lived in that house for many years and are older and maybe retired. I read there was a boost to these windows replacement sales due to pension lump sums being taken, maybe those are drying up now? Anyway these companies are struggling now and we are not even in a recession. Think part of the problem is Brexit. Not a fan of Safestyle with their aggressive sales tactics, don't ever contact them for a quote. I see they have been fined again.

whitmad

31st Oct '17

Safestyle has more to do with "discretionary consumer spending" along with furniture, cars, holidays, etc. Stuff that is (a) expensive and (b) non-urgent. Very different I think from housing and on a rather different cycle. Discretionary spending is already being hit by declining real earnings and brexit fears, housing not so much, at least not yet, possibly because of support from the government schemes and by a chronic shortage in some areas.

pone

31st Oct '17

I am from the US. Can you help me understand how Brexit might be shutting down home improvement purchases?

I understand Safestyle sells aggressively. However, the company's competitive advantage is that as direct seller they have lower costs. Rather than passing that on and selling at the lowest price, they chose to invest extra money in sales and marketing. That decision has resulted in them stealing market share for years.

Their ROA, ROE, and ROIC are unbelievably good and steady. I can't dismiss them for selling aggressively.

herbie47

31st Oct '17

Brexit has caused a lot of uncertainty, over jobs, the economy, may cause recession, has caused inflation to rise and interest rates look like they will go up next month, this means people have less money to spend and some don't know about their job future. So some people will put off buying these products until things are more certain.

If you look at Topps Tiles (LON:TPT) back in 2007-2009, you will see the big fall, you don't want to be in this sector in a recession.

pone

1st Nov '17

Your point is well taken. But for a high quality cyclical that has very little solvency risk, I would be pretty happy buying it at trough earnings at the peak of a recession if the price to sales were around 0.5. Of course you always want to look back if a given company has the history, which unfortunately Safestyle does not. So you have to make some guesses. But a company that can produce ROIC > 20% consistently is not going to remain at a price to sales of less than 1 when the cycle turns.

pone

1st Nov '17

herbie47, so if this recession is a consumer recession that is essentially a fear of uncertainty about what brexit will do to the economy, does that imply that conditions will remain depressed until after March 2019 (or later if brexit happens later)? That's a pretty extended economic slump, just based on uncertainty about policy.

herbie47

1st Nov '17

Yes it probably will unless there is some deal done. Just read Begbies Traynor (LON:BEG) red flag report, this shows more companies are in distress and points out if interest rates rise that will make things worst. Worst sectors are retail, construction and support services. Profits warnings are also up last quarter, these two reports are quite good indicators of where the economy is heading. With inflation, wage rises, rate rises and maybe interest rate rise you can see companies are being squeezed. It’s not just a fear about the economy it’s knowing about your job, some companies may even relocate abroad. Companies also can’t plan, contracts have been postponed or cancelled, you will read this in profit warnings or trading updates. Of course we may get a good deal with Eu and everything will be back to normal. We are not in recession, some companies are doing well but some sectors are struggling. Safestyle UK (LON:SFE) does not have much history, don’t know of any other similar listed company that has history, I know Anglian windows which is similar went bankrupt last recession, many of these companies do then they start up again. It is very cyclical business, so buying at the bottom can be rewarding, see Topps Tiles (LON:TPT) again.

Logic

1st Nov '17

It would be rather detrimental to the UK to leave the EU without any form of trade deal. I do not believe we are at a point of no return though.

That said, regarding house builders: They did very poorly last financial crash, but that is not to say that they will do very poorly again. Most of them state that they are now cautious and are not overextending, with some of them returning excess cash to shareholders rather than attempt to invest it projects with smaller margins. I am not sure that means they are recession proof by any means, though.

As for interest rates going up, I suppose it depends on the Bank of England. It may well have to pick to either impoverish people (allow inflation to increase significantly) or crush the economy (significantly increase interest rates).

pone

1st Nov '17

Are there other UK companies in cyclical businesses that:

1) Have very high ROE and ROIC consistently

2) Have revenue growth (in the years prior to this potential recessionary period)

3) Have low debt and are virtually bankruptcy-proof

4) Are trading sharply down (similar to Safestyle and Epwin)?

I guess this all started with Safestyle because of its early warning to the market, but this issue should ultimately affect many cyclical businesses? It would be nice to identify a pool of stocks similar to Safestyle that one could invest in during a recession with little fear of bankruptcy.

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Tracking a Potential Housing Recession in UK

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Pone

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