Results from building sector are litmus test for recovery

A trio of construction companies today issued updates that investors ought to read.

Three stocks spanning the UK's construction industry sounded notes of cautious optimism today as they look to recover from the severe impact of Covid-19 lockdown disruption.

The biggest of the trio, FTSE 250 index listed housebuilder Redrow (LSE:RDW) saw annual profits slump 66% to £140 million but offered encouragement for the new financial year after the value of its forward order book jumped 39% to £1.42 billion.

Galliford Try (LSE:GFRD), which is now debt free and focused on construction work after selling its Linden Homes operation in January, reported a full-year loss of £59.7 million. However, its order book has since grown to £3.2 billion due to public and regulated infrastructure work.

Maiden results from Brickability (LSE:BRCK) covered the year to March 31, with a 42% rise in profits to £12.2 million followed by a loss-making April as restrictions took hold. The AIM-listed company, which distributes building materials and roofing products, returned to profitability in May and described its core market as strong based on current trading levels.

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The updates were well received by investors as Redrow shares held firm at 456p, Galliford Try lifted 2% to 89.7p and Brickability jumped 5% to 45.6p. The performances echo the tentative progress seen elsewhere in the housebuilding sector, with Persimmon shares down by 5% across 2020 but Taylor Wimpey (LSE:TW.) and Barratt Developments (LSE:BDEV) still 30% lower.

The suspension of dividends has removed a core attraction for many of these formerly high-yielding stocks, although Redrow said current trading and its forward order book meant it expected to resume payments next year. It distributed 60.5p a share or £218 million to shareholders in 2019 but nothing for the 2020 financial year.

The company highlighted some uncertainty caused by changes to the Help to Buy scheme from next April. The scheme, which has boosted the industry for many years, will be restricted to first-time buyers and there will be regional caps on the value of homes that can be supported. 

For those unable to qualify for Help to Buy next year, Redrow noted there's the added pressure caused by a recent squeeze on the availability of high loan to value mortgage products.

Galliford Try also signalled the return of dividend payments next year as it looks to benefit from a focus on its core strengths in building, highways and environment. It reinstated financial guidance alongside today's annual results, with CEO Bill Hosking confident the company has a strong platform for a return to profitability in this financial year.

This is based on full-year operating margins in the region of 1.4% to 1.6% and revenues of between £1.1 billion and £1.3 billion. In March, the company's updated strategy targeted a minimum margin of 2% by 2022, alongside revenues of £1.2 billion to £1.5 billion.

Galliford's recovery potential has led Peel Hunt to a target price of 190p. The broker said: “We retain estimates set pre-Covid, reflecting the underlying resilience and quality of operations.” Counterparts at HSBC and Liberum have targets of 140p and 150p respectively.

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Brickability paid a maiden final dividend of 1.085p after the Bracknell-based company saw a significant improvement in trading since May, with underlying earnings in June and July ahead of the same months a year earlier. It added that the fundamentals for new build homes remained robust.

Chairman John Richards said: “While the outlook is of course pandemic dependent, our core market looks strong and this is reflected in current trading levels.

“We believe that the group is well placed to serve that market and this effort will be reinforced by further organic and acquisition-based growth."

The shares are still over 40% below their post-IPO high of 76p, but analysts at Cenkos said the valuation looked too cheap to ignore, especially versus the company's peers.