Cairn Homes: Concerns overdone

22 Jan 2019

We publish a note today on Cairn Homes in which we refresh our estimates for the group and address market concerns about the trajectories of price and cost inflation that weighed heavily on the stock in H218.

Cairn confirmed last week that it met its FY18 unit sales target and the market (correctly, in our view) didn’t focus on the lower-than-guided revenue number. A gross margin above 20% and a solid forward sales pipeline underpins confidence for FY19, however we reduce our FY19E and FY20E estimates based, primarily, on re-profiled unit sales forecasts given enhanced company guidance. While we also adjust our FY21E estimates, these changes are more muted. On the issue of slowing house price growth, an easing in the annual growth rate was always likely in H218 given challenging base effects. A deep-dive of sales data at Cairn’s starter home sites is encouraging and price growth at these sites appears more stable than that indicated by official indices. Looking at build costs, while cost inflation is a reality, the advantages from operating at scale in a fragmented market are tangible.
 
Cairn Homes: New JV with NAMA at Parkside announced
 

Cairn Homes this morning announced that it had signed an investment venture agreement with NAMA which will aim to build 550 homes adjoining Cairn’s existing Parkside development.
 
Under the investment venture agreement, a new company owned 75% by Cairn and 25% by NAMA has already acquired the development site close to the Malahide Road, in north Dublin. The existing Parkside development, which was the first of Cairn’s large starter-home schemes, is nearing completion and has seen strong demand since 2015.
 
IMF cuts global growth forecasts
 

The IMF cut its forecast for global growth for the second time in just three months and warned of further downgrades. Weaker European growth and financial market volatility led to revisions. Among major economies, the deepest revision was for Germany, which the IMF now sees expanding 1.3pc this year.
 
US and China growth estimates remained unchanged in a positive for the global economy, however, trade war sees risks tilted to the downside.
 
May tries to avert split
 

UK PM, Theresa May, delivered a statement to the House of Commons yesterday on her Brexit ‘plan B’, which in the end looked much like ‘plan A’, which suffered the thumping defeat in the Commons a week ago. After holding cross party discussions, the PM explained that little progress had been made and as such she planned to continue working with her proposal to try and gain further concessions, not least on the Irish backstop, which she hopes will convince her confidence and supply partner, the DUP, to back her proposal, as well as the European Research Group’s (ERG) 60+ members. Note that May’s stance is very much aimed at limiting divisions and the threat of a split in her party, whilst also eyeing signs that the right of her party look to be more willing to accept an amended version of her plan as the prospect of a delay to Brexit, or even no Brexit at all, have risen up the agenda. Indeed, we note that ERG Chair Jacob Rees-Mogg was quoted saying “If she can get a deal with the backstop, we’d mostly hold our nose and vote for it”. In the discussions that followed May’s statement yesterday, the Prime Minister repeatedly refused to rule out an extension to the Article 50 Brexit period. Movement towards an extension of the Brexit period and other ‘softer’ Brexit options are coming about as Parliament takes on a greater role in directing the Brexit process. 
 
Corbyn proposing a series of votes
 

Next Tuesday (29 Jan) MP’s will debate and vote on the PM’s ‘Plan B’ and amendments (selected) to this plan. Amendments proposed are set to include the likes of a plan to see a 9 month Brexit delay to be triggered if the UK Parliament has not backed a deal by 26 February and also an amendment by Dominic Grieve which would give backbench MPs the opportunity to propose their own Brexit plans. Meanwhile Labour leader Jeremy Corbyn is proposing a series of votes in Parliament on options for how the UK can avoid ‘no-deal’, with one of these expected to be a second referendum. As leader of the opposition, it is almost certain Mr Corbyn’s amendment would be voted on, though Labour’s official position on such a second vote remains unclear. As we said last week, the timetable for Brexit to be progressed in time for an exit on 29 March looks very tight and the prospect of an extension has risen. But for Brussels to grant such an extension the UK need to outline its plan/reason for the extension. Comments from Brussels yesterday showed the EU on the whole playing hardball on the prospect of May securing further major concessions to her Brexit plan.
 
Economic releases
 

09.30 UK Average Earnings Index
09.30 UK Claimant Count Change
10.00 EZ ZEW Economic Sentiment
15.00 US Existing Home Sales