What place does a housebuilder have in your portfolio?

Wednesday, Oct 01 2014 by
What place does a housebuilder have in your portfolio

As a value guy, I’m not really sure. If I were to take a stab at valuing a housebuilder, it would comprise of two elements. It’s sort of like valuing insurance companies, really:

a) Value the land on their book. This sounds trivial – we have accounting book values for a reason – but the actual sums are more complicated than that. Housebuilders have portfolios which faced differing degrees of impairment during the crisis, and the companies which had the financial strength to restart big land-buying programs in the depths of 2009/2010 – while everyone else was battening down the hatches and staving off the baying banks – have a portfolio of land which allows for higher margin building today. They also have differing quantities of land, which are best modelled by comparing their land bank (in number of plots) versus their last-year completions. This is like valuing an insurance company’s in-force book; you’re essentially asking yourself how well-written their previous policies were, or how well bought their previous land was, and how benign the environment will be for that profitability over the next few years.

In sum, all you’re doing is adjusting the value of their book to take into account the expected profitability of that land and when it’ll be built on – the discount factor. That’s why housebuilders – in the good times – show such great figures. Anyone can make money by buying land, sitting on it for 3 years (and watching it increase in value by 25%), and then building a house on it and ‘making 40% margin’.

For what it’s worth, this was why I bought Barratt in 2010. I flatter myself – I was a rookie investor armed only with 3 basic metrics and an overinflated sense of my own skill… but I was buying it at 0.3 times tangible book, after a number of write-downs. I think if I put myself back in that spot today, I still buy Barratt. You can put in all sorts of assumptions about profitability or lack thereof and feel comfortable when you’re buying it for that price.

What about when they aren’t available at 0.3 times tangible book, but at 1.2 – 2.5 (depending on what you look at), like today? Well, again, you should probably adjust that figure to remove all the noise.. but you’re still, in part, relying on:

b) Value the future profitability. Again, this is like an…

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Barratt Developments PLC is a holding company. The Company is principally engaged in acquiring and developing land, planning, designing and constructing residential property developments and selling the homes, which it builds throughout Britain. The Company operates in two segments: Housebuilding and Commercial developments. Its housebuilding segment operates through approximately six regions and approximately 30 operating divisions delivering over 17,319 homes. Its Commercial developments are delivered by Wilson Bowden developments. It purchases land in targeted locations and designs homes for its customers using standard house designs. Its brands include Barratt Homes, David Wilson Homes and Barratt London. Its Barratt Homes brand focuses on making homes. Its Barratt London brand portfolio offers apartments and penthouses in Westminster to riverside communities in Fulham. Its David Wilson Homes brand offers home design and specification, and focuses on developing family homes. more »

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6 Comments on this Article show/hide all

Edward Croft 1st Oct '14 1 of 6

Gary Channon of Phoenix Asset Management made an amazing conviction bet on Barratt a few years ago - he put 30% of his fund into it, stood up at the London Value Investor Conference and told all London's finest Value Investors that he'd done so.  It proceeded to triple over the next 18 months.

I know the team at Phoenix, and back in Feb when I saw them last they still had a £6+ intrinsic value on the stock.

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UK Value Investor 3rd Oct '14 2 of 6

They're a bit too cyclical for me. First of all I only invest where a company has paid a dividend consistently for a decade or more, and Barratt for example hasn't done this. The only one my screen picks up is Bellway which maintained its dividend through the crisis, but revenue, earnings and dividends are all down over a decade and that's also something I sidestep.

Even with that wobbly track record Bellway shares have a yield of 1.9%, so investors are expecting record dividends or growth in the future, so I don't think they're especially cheap either.

However, they might be okay for investors who use different metrics, which I guess is the case with the Pheonix team that Ed mentioned.

Blog: UK Value Investor
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JTG 9th Oct '14 3 of 6

Well, I hold some Berkeley, Persimmon and Taylor Woodrow, all bought this year, and am thinking of topping up slightly on a down day. I never thought I'd buy into BKG. They sort of represented wide-boy swagger in London to me. BUT, boy have they done well and still currently hit 8 Stockopedia screens.
I think the macro event I hadn't allowed for before as an investor was the scale of population rise, 'knowing' 20 years ago we would top out at 60m. I think people need places to live: I see how hard it is for my children; and I believe all political parties will work to enable more properties to be built (it employs a lot of manual labour, and those shelf-stackers will do better on a building site than in an Amazon warehouse). Conclusion: I believe their market will grow. This will maybe hit margin %, but these builders are effectively ungeared and I think they've learnt to be more financially cautious.
So what am I saying? Not that they'll shoot the lights out, but that the downside to holding them is quite limited. House price decline news with hit their SPs short-term, but they'll continue to generate cash for a long time to come.
If they all decline, maybe it'll be easier for my children. If they grow, I can help them myself. Try that on for a win-win idea...

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djpreston 9th Oct '14 4 of 6

When it comes to housebuilders, Ialways find myself drawn to the comments of Tony Pidgely at BKG. He has one heck of a record for calling the property market correctly and critically I like the way that he aims to keep the company relatively small - liquidating property holdings when he thinks prices have gone too high, returning funds to shareholders and then going back to them when prices are low. The current scheme to return cash to shareholders over a set time frame is laudable I think . The company is "his" baby and not just a vanity vehicle.

Fund Management: European Wealth
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extrader 9th Oct '14 5 of 6

Hi all,

Interesting thread ! I'm not into builders generally (though did very well with Ben Bailey, where I also first met Paul Scott and Carmensfella), but seem to recall there's been some work done on builders' seasonality, viz.: if you buy a portfolio of builders in the autumn and sell the following spring, you almost always make money.

Anyone care to confirm/comment ? Many thanks in advance !


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JTG 10th Oct '14 6 of 6

Yes, extrader, heard that one too, will come back here if I can find a link, but there was a statistical study of this. Some of it is suggested simply to do with the same behaviour that makes people think about buying houses once the snow has gone. If they are down now, don't expect a change of market view till March. Having said that, I couldn't help myself topping up on BKG today at £20.70. The forthcoming return of capital is just too much of a temptation to me on a share where a Director with a significant holder has just lobbed another £50k at it at £22.63.

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Private investor turned hedge fund analyst, looking predominantly at global small caps. Sector agnostic.


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