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Questor: this small Scottish housebuilder appears to have solid foundations. Buy

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Housebuilding graphic
Housebuilding graphic

Housebuilders are in the firing line as far as ministers are concerned and it is not hard to understand why. There are good moral reasons why the bill for cladding remediation should be paid by the builders responsible, rather than luckless leaseholders.

There are good reputational reasons why the industry should do the right thing and be seen to do it. And, from a financial point of view, any claims from the housebuilders that they cannot afford to help foot the bill can only fall on deaf ears: in 2022 the FTSE 100 and FTSE 250 builders in aggregate are forecast by analysts to generate £5.1bn in operating profits and pay £2.3bn in dividends, while their combined net cash pile comes to £5.6bn according to their latest sets of interim or final results.

This is a cloud that is not going to go away immediately and investors could also be forgiven for worrying about 2021’s end to the stamp duty holiday, rising costs and what the prospect of higher interest (and mortgage) rates may mean for the housing market.

For all of that laundry list of concerns, this column is going to stick with both Vistry and Crest Nicholson, because the fundamentals of the industry seem strong, given the apparent imbalance between demand and supply, and the political desire to support buyers.

It may even be worth having a look at another housebuilder, albeit one where the narrative is slightly different, for geographic reasons if nothing else.

Springfield Properties builds private and affordable houses in Scotland and has much to commend it, including a strong balance sheet, a substantial land bank and an element of vertical integration that could help to protect it from the worst of any supply chain disruption and input cost inflation.

From a strictly investment point of view, the dividend yield is tempting and the share price does not look excessive relative to historic book, or net asset, value per share.

Springfield’s geographic positioning makes it particularly interesting for three reasons. First, Scottish house prices are motoring. The latest survey from Halifax (for last month) shows that prices rose by 9.7pc year on year. However, the average selling price is £192,988, well below the UK average of £276,091. There could therefore be a bit of catching up to be done.

That in turn could help Springfield to make good margins on its land bank of 15,281 plots (which compares with last year’s 973 completions), which are focused on villages and developments away from the major cities.

Second, the Scottish house-buying regime gives greater visibility on completions and sales, as the buyer is contracted into the purchase much earlier, so cancellations should be rarer than they are across the rest of Britain.

Finally, another, larger, Scotland-based builder, Miller Homes, has just been acquired by private equity group Apollo. Miller operates in England as well as Scotland so the parallel is not exact, while financial details of the transaction were scanty, but the swoop suggests that Springfield is operating in the right industry at the right time.

This is all well and good but investors do not get paid for recognising, or telling, good stories. It is the valuation paid to access that narrative, and the profits and cash flow that result from it, that count. A forecast price-to-earnings ratio of less than 10 is a good start here, as is a forecast yield of almost 4pc, based on analysts’ consensus forecasts, for a dividend that looks like it will be around 2.5 times covered by earnings per share.

A further key valuation metric for builders is price to book value. The rule of thumb is that one times book (or less) is cheap and two times or more is close to fair value or even expensive. With a market value of £180m and net assets of £111m, according to the last set of accounts, Springfield trades on about 1.6 times book value. But as profits keep rolling in, book value will rise and that multiple will fall, all other things being equal.

Springfield appears to have solid foundations.

Questor says: buy

Ticker: SPR

Share price at close: 152p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

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