Housebuilder delivers profit warning on back of coronavirus pandemic

John Tutte

Housebuilder Redrow said the coronavirus pandemic has prevented it from reporting another year of record results, and warned profits will be “substantially below” last year’s levels.

In a trading update for the year ended June 28, this morning the group, based in Ewloe, near Chester, said the timing of site closures due to COVID-19 towards the end of March had a profound impact on its results in a year which was budgeted to be disproportionately weighted to the end of the second-half.

Adapting to new ways of working also limited the number of homes that were completed in the last few weeks of the financial year after construction activities were able to resume.

The group completed 4,032 homes in the year to the end of June, compared with 6,443 in the previous year. Turnover is expected to be £1.34bn against £2.11bn last year.

The group secured 4,222 private reservations in the year with a value of £1.61bn (2019: £1.67bn).

In the five weeks since reopening its sales offices, the group has achieved a net sales rate per outlet per week of 0.56 (2019: 0.59) reflecting strong pent-up demand, especially from buyers using the Government’s Help to Buy scheme.

As a result of the group’s strong sales performance earlier in the year, and the significant shortfall in legal completions due to the COVID-19 lockdown, the group enters the new financial year with a record order book of £1.42bn (2019: £1.02bn) of which around 70% in terms of revenue is contracted.

The group is currently undertaking construction activities across 124 developments and has 113 sales offices open (2019: 129).

Remote working remains in place for many office-based staff and the group no longer has any of its workforce furloughed.

Given the business’s resilient cash flow, the group has decided not to utilise the Government’s Job Retention Scheme and is in the process of returning all payments received under the scheme.

It said the new construction protocols that have been put in place, together with extended customer handover procedures, lengthened build times and this will continue to impact the pace of output over coming weeks.

Redrow ended the financial year with £126m of debt (2019: £124m cash).

At the beginning of the pandemic the group increased its revolving credit facility to £350m and, as a precaution against the risk of an extended lockdown, obtained eligibility under the Government’s CCFF.

Due to a timely return to work and the effectiveness of measures taken to protect its cash flow, the group is unlikely to draw on the CCFF.

Following a review of its divisional businesses, Redrow has decided to scale-back its operations in London to focus on its Colindale Gardens development in North London and continue to target the group’s future growth on the higher returning regional businesses and its Heritage housing product.

The costs and related significant impairments associated with scaling-back the London business will be provided for in the June 2020 accounts.

Redrow said that, as a consequence of the impact of COVID-19 and making these provisions, the profit for 2020 will be substantially below 2019.

The group has called on the Government to approve an extension to the existing Help To Buy scheme beyond March next year or change the scope of the new scheme to provide access to a broader range of buyers.

Executive chairman, John Tutte, said: “This has been a challenging period for the industry and prevented the group from delivering another set of record results.

“The business has, however, demonstrated its resilience throughout the crisis and I am immensely grateful for the dedication of my colleagues, the commitment of our wider-workforce and the continuing patience of our customers as we adjust to a new way of working.

“Whilst these extraordinary times have been testing for the business, they have provided us with an opportunity to focus on our core strengths, putting product, customer satisfaction and the environment at the heart of a recovery strategy to maximise shareholder returns.”

Redrow’s shares opened trading this morning at 441.80p per share, before falling quickly to 429.23p. By mid-morning they had recovered to 440.88p per share

Russ Mould investment director at Manchester investment platform AJ Bell, said: “Housebuilders have become addicted to the Government’s Help to Buy scheme and Redrow is the latest player to plead for more.

“Having warned that its earnings will be hit this year because of COVID-related issues, Redrow has now called for the Government to extend the existing scheme beyond its current March 2021 end date.

“As it currently stands, the scheme will switch from April 2021 to one only available to first-time buyers and Redrow believes it should really be available to a broader range of property purchasers.

“Help to Buy has been a major boost to housebuilders’ sales and there is a growing fear that many companies are too dependent on it.

“Take it away and housebuilders’ earnings could potentially suffer, despite there being an imbalance between supply and demand causing a housing shortage in the country.

“Redrow’s shares have tanked on its latest update, despite analysts having already forecast for pre-tax profit to fall by 43% to £233m in the year to June 2020.

“The big clue as to why the market is disappointed lies in the revenue guidance of £1.34bn.

“That is below the analyst consensus forecast of £1.46bn and so profit is likely to be lower than current market estimates, particularly as it flags extra costs and impairments associated with a decision to reduce exposure to London.

“Notably, the volume of homes completed in the financial year is significantly down on 2019.”