A housebuilder immune from the gloom

By Annunziata Rees-Mogg Oct 31, 2005

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Gloom over the prospects for UK house prices has dragged down the shares of building firms, says Derek Moorhouse in the Fleet Street Letter. But that doesn’t mean they should all be avoided. McCarthy & Stone (MCTY) is a specialist builder whose niche is retirement homes, which have more “resilient” pricing power than the sector average. Indeed, in the half year to February, the average cost of a McCarthy & Stone home increased 16% to £165,000 – “far outstripping mainstream builders”. Nonetheless, the share price has been pulled down with the rest of the sector, and now looks cheap.

The firm’s success is partly due to the sustained rise of the over-60s. In the longer term, it’s “well placed” to take advantage of demographic trends in the UK, and overall “this trend is emphatic: Britain as a nation is getting older, fast”. McCarthy is in an extremely good position to take full advantage of the growing market. Currently, it has two-thirds of the UK market and “no significant” competitors. Moreover, there are stiff barriers to entry into the retirement-home market, such as the slow planning-permission cycle, which means it can take five years to complete a project.

The financials are “equally impressive”, says Moorhouse: profits have been up every year for the last 11 years and the dividend has risen from 6.3p per share in 1999 to 17.3p in 2004 and is covered more than five times by earnings. In fact, “cash generation has been so strong” that the firm has done away with gearing. The shares have fallen throughout 2005, and currently trade on a p/e ratio of under 5.4 times: “too low for a company with a solid track growth and clear growth prospects”. Buy.

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Published in Tips & advice | More articles by Annunziata Rees-Mogg

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