Buoyed by 28 per cent higher completions, Springfield Properties (SPR:115p), a housebuilder focused on developing a mix of private and affordable housing in Scotland, delivered record results for its 2021-22 financial year despite facing supply chain pressures. The group also strengthened its land bank, up 9 per cent to 16,652 plots, excluding the post-period-end acquisition of the Scottish housebuilding and timber operations of Mactaggart & Mickel (‘A Ben Graham value play’, IC, 22 June 2022).
The market fundamentals remain strong, hence why 75 to 80 per cent of the private housebuilding division’s projected revenue for the 2022-23 financial year is already delivered, reserved or under missive (sales legally confirmed under Scotland’s conveyancing laws). Analysts at Progressive Equity Research expect private housebuilding completions to increase 31 per cent to 933 units this year to deliver 52 per cent higher divisional revenue of £265mn, the higher revenue growth reflects a higher estimated average selling price of £284,000, up from £248,000 in the year just ended. However, there are two headwinds facing the business.
Firstly, revenue and margin in Springfield’s affordable housing division have been impacted by price inflation, as well as key subcontractors going out of business. Affordable housing construction has fixed-price contracts that in normal times produce strong cash flow dynamics with low capital exposure, but current market conditions have prompted the board to temporarily pause entering new, long-term affordable contracts to protect margins until the inflationary environment normalises.
The other issue is that the Scottish government has recently imposed a rent freeze and moratorium on housing evictions until 31 March 2023 at the earliest, which has forced the board to put on hold the expansion of its private rented sector (PRS) activity with Sigma. Ultimately, the Scottish government’s intervention is likely to backfire, tightening private rented supply as private landlords exit the market, thus acerbating the supply-demand imbalance in the rented sector.
However, to reflect lower affordable housing and PRS activity, analyst Alastair Stewart at Progressive has reined back his pre-tax profit estimates for this year and next by high single digits to £27.3mn and £33mn, respectively, on revenue estimates of £359mn and £372mn. However, this still implies respective earnings per share (EPS) of 18.2p and 20.4p, up from 15.6p in the 2021-22 financial year.
Moreover, with estimated net debt of £46mn at 31 May 2023 less than a third of the group’s net asset value (NAV), then the board can continue recycling free cash flow back to shareholders. Stewart predicts that payouts per share of 7.5p and 8p, respectively, will be covered by free cash flow of 12.3p a share (2022-23) and 19.7p (2023-34), implying the shares are rated on a forward price/earnings (PE) ratio of 6.3, offer a prospective dividend yield of 6.5 per cent and are priced below NAV of 121p, too.
So, although the Aim-traded shares have traded sideways since my last buy call, and are showing a 10 per cent negative total return since I included them in my 2021 Bargain Share Portfolio, albeit the FTSE Aim-All-Share index has shed 27 per cent of its value in the same period, they continue to rate a recovery buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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