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Billion-pound stockpicking veteran: housebuilders cheaper than before Budget
by Robert St George on Sep 26, 2013 at 14:26
Martin Hudson, who has managed the £1.7 billion Mercantile Investment Trust since 1993, has argued that despite the recent rally there is plenty of value left in housebuilders.
Over the past year the FTSE All Share Household Goods & Home Construction index has gained 35%, outpacing the FTSE All Share’s 15% over the same period, having been spurred on by supportive measures such as Help to Buy, introduced by chancellor George Osborne in his spring Budget.
Hudson maintained that it’s too soon to begin taking profits from the sector, however. ‘They are cheaper now than they were six months ago,’ he claimed.
Housebuilders have traditionally been valued relative to their land bank, and considered cheap when they trade at a discount to this, but their recent share-price surge has brought many to par with their inventory.
As an example of why that approach was outmoded, Hudson cited Barratt Developments, which accounts for 2.2% of his portfolio. With the group now earning a 25% return on capital on its new land, Hudson reckoned that it should be worth 2.5 times its net asset value, to which it currently trades around parity.
For Hudson, Barratt was also emblematic of the health of the wider sector. Before the crash it had pursued growth through acquisition financed by debt, but Hudson found it had now ‘fixed’ its balance sheet – with its debt pile 90% lower than in 2009 – and was able to borrow at ‘sensible rates’, half what they had been.
More broadly, Hudson took additional comfort from cost-cutting programmes and recent consolidation in the industry, with the listed housebuilders now boasting a 40% market share for new-build transactions after smaller operators were squeezed out by a harsher lending environment. ‘Before the crisis,’ Hudson recalled, ‘you could go to the bank, borrow £1 million, buy someone’s garden and build four new houses.’
His Mercantile fund currently owns Barratt, Bellway, Berkeley, Bovis, Persimmon and Taylor Wimpey, together comprising approximately 15% of his portfolio. ‘The news flow from them is unremittingly good,’ added Hudson.
As ancillary plays on the housing market, Mercantile has stakes in estate agent Countrywide and T Clarke, a specialist construction contractor that installs a project’s internal electrical infrastructure. Hudson characterised this as a ‘late cycle’ investment, since it will benefit once developments such as Crossrail or the "Walkie Talkie" building at 20 Fenchurch Street in the City neared completion but needed wiring.
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