REDROW PLC (RDW:L)

13 MARCH 2014 COMPANY INFORMATION

Ticker Market Sector Share Price 13/03/2014 52 Week High 52 Week Low Market Cap Dividend Dividend Yield 12 Month Profit/Loss Duomo Capital Rating RDW:L FTSE 250 UK Homebuilders 312.00 GBX 352.60 GBX 170.02 GBX 1.17bn High 0.67 78.29% BUY

UK HOMEBUILDERS SHOULD CONTINUE TO THRIVE IN 2014

The rebound of the construction and real estate industries has been one of the key factors behind the wider economic recovery in the UK with residential homebuilders a main benefactor. This rebound is set to continue into 2014, owing to increasing land and property prices which are particularly inflated by the Bank of Englands quantitative easing policies, high demand and land scarcity in desirable areas such as London. The UK House Price Index has risen by 4.2% since March 2013 with a 25% rise on average across the UK expected to continue over the next 5 years. Ceteris paribus, this increases the profit margin of every new home sale in addition to existing landbank values. There is also considerable demand for new housing especially in the South East where employment prospects are higher. This is counteracted by poor supply which adds a premium to successful projects and planning applications. Furthermore, lower interest rates and government backed schemes such as the Help to Buy have made mortgages and new homes a more viable proposition which has increased homebuilder sales volumes. Most of the downside risk may become more pronounced towards 2015 with planned interest rate rises likely to temper the attractiveness of cheaper mortgages. The run up to an election in 2015 may also create share price volatility for homebuilders if currently advantageous schemes are subject to political attention. Material cost inflation will also continue to erode profit margins. Although unlikely in the near-term, a bursting of the London property price bubble due to increased taxes or mortgage defaults would especially harm prospects for homebuilders which are heavily concentrated in the South East and without access to prime, devaluation proof Central London assets or developments.

REDROW PLC (RDW.L) 1Y

REDROW: HISTORICAL OVERACHIEVER WITH DOWNSIDE PROTECTION

Redrow PLC (RDW.L) is a residential developer which is primarily focused on providing a variety of housing projects and mixed use developments. The company has seen strong share price growth since 2008 with returns that are often higher than homebuilder sector benchmarks. Redrow PLC has many attributes that have amplified its success in favourable market conditions whilst actively protecting against future downside risks, ensuring that share price growth is set to continue with continued fulfilment of strategic objectives. At a glance, Redrow PLC achieve a greater Average Selling Price (262,000) in comparison to other competitors (Barratt Developments BDEV.L 225,200, Bovis Group BVS.L 213,000) in reality this indicates that Redrow are positioned slightly more upmarket and command an extra premium for more expensive and desirable land (average plot cost: 57,000 vs. BDEV.L 48,976). Average Selling Price and Average Land Price are the two factors that are most affected by inflation and allow a healthy gross margin of 78%. Operating Profit is an area where Redrow is able to differentiate from the competition, in H1 2014 Operating Margin was 14% which is higher than close competitors in the same period (BDEV.L 11%, BVS.L 13%) and has been growing year on year. As Redrow have a medium sized land bank they are not reliant on large sales volumes like BDEV.L and are more adaptive to market trends. This ensures that they can control project costs (such as material costs and subcontractors) with greater efficiency and put houses to market faster, to satisfy demand in a more timely manner as shown by industry leading weekly sales volumes. Redrow is shielded from many of the downside risks especially regarding London asset prices as their portfolio contains a large exposure to London (48%) but not enough to be the core profit driver, unlike companies such as BVS.L which have a greater South East asset weighting (75%). Interest rate, mortgage demand and policy changes would have a greater proportionate affect to Redrow due to the company being a devout new home builder. In H2 2014 Redrow offered an interim dividend for the first time in 6 years, highlighting internal confidence of continued progress and EPS gains. A Price to Earnings ratio of 15.56 is slightly below industry averages (19.29) which highlights its status as a value stock with increased upside potential, rather than speculative stock. A higher gearing of 38% compared to competitors is a sign of increased project acquisition and growth funding with higher interest costs being offset by continued gross margin growth. This research article does not constitute investment advice.

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