10th Nov 2023 13:05
(Alliance News) - Redrow PLC's downbeat trading update on Friday reflects conditions in the wider UK housing market, according to analysts and the St Davids Park, Wales-based housebuilder itself.
Redrow said its full-year results are likely to be towards the lower end of its previously guided range, as the UK housing market "remained subdued" through the autumn selling season.
The value of net private reservations in the first 18 weeks of financial 2024, which began on July 1, was GBP384 million, down 25% from GBP515 million a year before.
Redrow said this followed the "usual summer slowdown" that it reported in its financial 2023 results announcement, with the housing market remaining "subdued" through the autumn.
"The business has had to adapt to this more difficult trading environment in terms of build rate and operating costs," said Chair Richard Akers.
AJ Bell analyst Russ Mould commented: "We know the housing market is in a bad place so Redrow's disappointing trading update can be seen in that context. Despite a slowly improving picture on borrowing costs, mortgages are still expensive and there are other pressures on people’s spending power, and all of this is having an impact on demand."
Redrow explained that while 35% of its private customers are cash buyers of homes, they sit atop house purchase chains that are breaking down more frequently due to difficulties with mortgage loans lower down the chain. This has caused the housebuilder's cancellation rate to rise to 25% from 22% a year before.
As a result, net weekly reservation rate per outlet was 0.36 in the recent 18 weeks, up from 0.34 in the first 10 weeks but down from 0.38 in the first half of financial 2023. As well, the average selling price slipped by 2.5% to GBP471,000 from GBP483,000. Homes turnover for the recent 18 weeks was GBP456 million, down from GBP650 million a year ago.
Liberum analyst Edward Prest commented: "Although Redrow's customers are generally financially resilient, they tend to be nearer the top of chains, and more chains are breaking down amid mortgage difficulties further down."
Redrow operated from 125 outlets in the recent period, up from 120 a year ago, but due to the slower sales, it expects the average number of outlets for the full year to be about 113, down from the 117 it had previously guided. The total order book as of November 3 was worth GBP864 million, of which 66% is exchanged, down from GBP1.36 billion with 74% exchanged at the same time last year.
More positively, Redrow said build cost inflation is abating. It is expected to run at about 7% in the current financial year.
"What paints things in a worse light for Redrow is several of its peer group have announced more solid performance over the last week or so and there have been some signs of stabilisation in property prices too," AJ Bell's Mould pointed out.
MJ Gleeson shares are up 1.3% across the last five days, while Bellway is down 0.4%. Redrow is down 2.9%.
Mould continued: "For Redrow to then come out and say annual profit will be at the lower end of its forecast range is unsurprisingly going to draw a negative response from investors. It may suggest that Redrow's area of focus – larger homes typically aimed at second or third-time homeowners – is proving a tougher market.
"At the same time, inflationary pressures are proving stubborn. Redrow and its rivals will be hoping the outlook has improved significantly by the time of the usual spring selling season next year. For now, all they can do is hunker down and wait for green shoots of recovery to appear."
UBS and Liberum both backed Redrow with a 'buy' rating, setting a target price of 585 pence and 620p respectively, while Davy gave a 'neutral rating' but with a strong target price of 618p. Redrow shares were down 5.6% to 490.80p each in London on Friday afternoon.
Davy analyst Colin Sheridan said he expects "modest" forecast downgrades following Redrow's announcement, which UBS analysts concurred with, while Liberum said it preferred MJ Gleeson at 'buy' with a 570p price target for its "greater exposure to first-time buyers and therefore lack of chains". MJ Gleeson shares were down 1.1% to 414.34p each in London on Friday afternoon.
Redrow will release results for the half-year ending December 31 on February 8.
By Greg Rosenvinge, Alliance News senior reporter
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