Stock market ignores housebuilders’ profits

Of the 12 housebuilders that made it into the FTSE 350, all ranked far higher when judged in terms of profitability than companies in other sectors. However, this was not the case when judged by market capitalisation.

The argument that share price does not reflect the full value of a company is a common gripe among housebuilders, which are frustrated by the relatively lower rating afforded to the sector by the market.

David Arnold, finance director at Redrow, said: “From a profit perspective we are much more significant earners than our market capitalisations would suggest.”

Redrow was ranked 238th in terms of market capitalisation but 117th in terms of pre-tax profit.

No housebuilder has yet made it to the prestigious heights of the FTSE-100. Persimmon is closest to achieving this, with a market capitalisation of more than £2bn.

However, in terms of profitability, seven housebuilders make the top 100.

Phil Lindsay, a housing analyst at international bank AMN Amro, said that the reasons were historical. “It stems from a lack of trust in the sector,” he said. “The UK market still thinks that UK housing is very much a boom-to-bust industry, believing that profits are inflated by house prices and that true earnings are somewhat lower.”

According to Lindsay, inherent mistrust was built in the late 1980s and early 1990s, and operational gearing among housebuilders still effectively meant that even a 5% fall in house prices could hit profits by as much as 25-30%.

“Last time, housebuilders did not tell the market quickly enough when there was a downturn and it all got very messy. Since then, the stock market has not been willing to up its valuation,” said Lindsay.