McCarthy & Stone

Should you be bullish on McCarthy & Stone share price?

McCarthy and Stone PLC saw their share price fell by 40% since debuting late 2015, but after today’s results is the stock a buy?

 

Final Results

Share Price: £1.57 (up 7%)

Market Capitalisation: £846m.

 

McCarthy & Stone PLC has posted their results and it is looking pretty good for 2018 (if the information turns out to be true).

But back in 2017, the company reported revenue growth of 4%, as homes completed saw an increase of 8 more than last year. It takes the total to 2,302 units. The helping hand came from the average selling price rose to £273k from £264k.

McCarthy & Stone Chief Executive, Clive Fenton has said:

We achieved a strong result in the second half of the year and delivered an improvement in both margins and volumes compared to the first half of FY17.”

Meaning the housing market looks to be in recovery.

Meanwhile, the homebuilder saw profit before tax fell by 1%, and the ROCE fell to 16% from 20%. That’s looks to be temporary (See below).

 

Onto their balance sheet and cash flow statement:

The decline in their cash balance from £119m to £40.7m has contributed to net cash falling from £52.8m to £30.7m. It is down to two factors: –

 

Cash flow statement2017

£m

2016

£m

 

Dividend paid(28.5)(5.4)
Repayment of long-term borrowings(45.0)(35.0)

 

They increase their dividend payments from last year to £28.5m and they repaid most of their debt. Both of these transactions saw cash outflow of £73.5m resulting in total borrowings falling to £8m from £60.9m last year.

Their negative net cash profit of £3.8m from a positive cash profit of £18.3m, was down to lower cash inflows from payables and that is not necessarily a bad thing. It could contribute to higher cash profit in the future if it was seen as paying their suppliers too early.

 

Earlier I stated 2018 results should look good for McCarthy & Stone because of the lower costs from acquisitions of new land and building per plot (in layman terms).

 

Details of this and calculations are below:

In FY 2016, it cost the homebuilder an average £179k to build one unit (£468m dividing by 2,614 plots). But in FY 2017, McCarthy & Stone has acquired an equivalent of 3,164 plots for £472m, giving it an average cost per plot of £149k.

That means McCarthy & Stone has saved £30k per plot/unit for the 3,164 units. It could mean an approx. saving of £94.9m and increasing margins.

But measuring this benefit is hard because of the uncertainty arising from the selling price per unit to regional home prices. I mean if these plots are in areas where the average selling price per unit is lower then where McCarthy & Stone operates in.

 

However, management seems to confirm this hypothesis of acquiring plots on the cheap on areas likely to maintain their current selling price level, as it states: “The workflow of the business remains firmly on track as a result of our continuing investment for growth and allows us to target future increases in both margin and ROCE with the aim of achieving a ROCE of 25% over the medium-term.

 

 

Not so great

Although there is excitement for McCarthy & Stone’s earnings for next year, there are a few drawbacks I like to point out.

First, the explanation for the reduction in profitability was mainly driven by the age and mix of units sold is poor because regardless of the age and mix of housing units sold, the average price per unit sold still rose by 3% from last year.

Secondly, it’s true management has secured future sales to 2020. But they neglect to tell investors their land bank has been steadily decreasing for a number of years now.

McCarthy and Stone land bank in years

It used to have six years’ worth of inventory, but this declined to 4.3 years.

 

 

 

HISTORICAL PERFORMANCE

 

McCarthy & Stone Plc is a growing retirement homebuilder. Its turnover rose from £99.2m in 2009 to £635.9m by 2016.

The number of homes completed grew from 1,370 units to 2,299 units, as the average net selling price per home rose to £273,000 from £167,000 in 2009.

This has helped the homebuilder to report an increasing amount of operating profit from £10m to £94m.

This is very brief, but the following section is of value.

 

Future Profitability

Management did mention higher profitability for the future by targeting ROCE at 25% and depending on the level of capital employed it could lead to higher operating profit.

In 2016, McCarthy’s capital employed was £752.1m and has slightly risen to £755.5m as the fall in cash balance is compensated on rising inventories.

If McCarthy manages to stabilise capital employed at a range of between £790m and £830m for the next 2-3 years, then a 25% ROCE could mean operating profit of between £197.5m and £207.5m.

Deduct 20% tax and 2% net interest costs (for prudent), then net profit ranges from £161.9m and £170m.

So, we are looking at a 2 to 3 year forward PE of between 4.98 times and 5.22 times by 2020.

 

 

Comparison with other homebuilders

Comparing McCarthy & Stone market metrics with other homebuilders below.

Comparison with other homebuilders

Here is a brief interpretation, McCarthy & Stone’s PE Ratio is below 10 times’ earnings mean it is fairly valued. Their price to NAV is the lowest amongst its peers at 1.2 times. The second lowest is 1.4 times by Barratt Developments.

When it came to their dividend yield it’s at a reasonable 3%, although this was lower than their major homebuilders. Finally, the dividend cover is decent.

 

Putting it together

 

McCarthy & Stone share price has fallen by 40% since its debut in the stock market late in 2015. Despite rising sales and profitability.

 

 

I expect the share price to pop by 30% to 40% because of lower acquisition costs and build per unit leading to higher future margins.

 

If that 25% ROCE metric comes true in two to three years’ time, then I expect 100% share price appreciation. Expect to see the share price rise to £3.

As I’m always cautious, be aware of house prices declining because it would be a negative on homebuilders’ stock price. People can easily forget the last time house prices fell, and that almost destroy homebuilders like Barratt and Taylor Wimpey with their share price down by 95%!!!

 

Other than that, I’m bullish on McCarthy & Stone.

 

 

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 DISCLAIMER

 

The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability.  I don’t hold the company’s shares unless stated.