Cairn: a housing boom plays a stone’s throw away

Much like the UK, Ireland is in the midst of a housing crisis. The small number of homes relative to the number of people who need them has caused the value of properties in the Republic to soar over the past few years. Stories of people struggling to get on the property ladder are as common in Dublin as they are in London, while the rhetoric used in the debate on how to tackle the issue will also be familiar to British ears.

IC TIPS:

Buy

Bull points

  • Irish housing demand
  • Big land bank
  • Rising profits
  • Discount to book value

Bear points

  • High house prices
  • Competitors have grown faster

These market fundamentals very much work in favor of Cairn Homes (CRN), one of Ireland’s largest housebuilders. After a tough few years, the company is now perfectly poised to build thousands of homes while also making healthy returns for its investors.

The Irish property market has changed a lot since the Celtic Tiger boom was followed by the 2008 economic recession and the overnight collapse of the Irish property market. The subsequent recovery in house prices has been swift – with the years since 2016 showing particularly strong growth.

Cairn’s incorporation in 2014 was timed perfectly to benefit from this surge. In the four years to 2019, the company swung from an initial annual pre-tax loss of £37.5mn to a profit of £37.6mn, having reported growing revenue and profit figures every year up until that point.

Then the pandemic hit, and Cairn’s share price dropped as the company’s revenues fell for the first time since its inception. The company has roared back to life since, but the market has not yet recognized this. The shares, still well below their pre-Covid levels, are priced at less than eight times forward earnings, just above their all-time low at the depths of lockdown in early 2020.

Considering analysts predict that profits and revenue will continue trending upwards for years to come, that looks like a bargain. There is also the prospect that Cairn’s growth could surpass even those bullish analyst predictions, seeing as the company beat revenue and earnings forecasts in both 2020 and 2021. For UK investors, further weakness in the pound – a trend many economists believe is nailed on – could also help to juice the relative attraction of the group’s euro-denominated earnings.

As we have argued in relation to UK housebuilders, we believe market concerns surrounding the sector mean Cairn has been oversold. While the threat of a downturn in the Irish and UK housing markets is real, the structural undersupply of affordable homes in both countries means we believe that many housebuilders – and Cairn in particular – will continue to thrive.

There are also a couple of ways in which Cairn is in a better position than its UK peers. For a start, there was no equivalent Grenfell Tower tragedy in Ireland. This means the cost of fixing decades of defective cladding and fire safety issues is not a problem that Irish housebuilders or the Irish public have to reckon with. Barratt Developments (BDEV), for example, was forced to book £414.5mn of provisions in its financial year to 30 June, most of which related to charges associated with the government’s Building Safety Pledge. To make matters worse, neither Barratt nor any other UK housebuilder can say for certain how much more they will have to pay. Cairn does not have this issue.

There also appears to be less aversion to granting permission in Ireland than in the UK. While proof of British Nimbyism stymying quality development is largely anecdotal, it is hard to imagine a British developer achieving planning permission to build an entire town for 23,000 people a mere 12 minutes from London’s city centre. Yet, this is precisely what happened to Cairn at the end of last month when it was given the green light to build 5,500 homes as part of a wider 9,000-home scheme in the new town of Clonburris in south Dublin.

The other difference between Cairn and the UK housebuilders is that rather than having to compete with a long list of other large players, Cairn has just one scale rival: Glenveagh Properties (GLV). It and Cairn represent the duopoly in the listed Irish housebuilding market – with market caps around the same size – and a lot can be learned from comparing the two.

TWO HOUSEBUILDERS, BOTH ALIKE IN DIGNITY
Cairns Glenveagh
Listed 2014 2017
Market cap* £578mn £629mn**
share price* 83.3p 92p**
Premium (discount) to NAV* -12% 1.50%
2022e Return on Equity 10.60% 7.40%
2022e Net margin 13.20% 8.80%
Total debt/EBITDA (Dec 21) 2.6x 2.2x
*As of 16/9/22 **£1=€1.14

The first thing to note is that Cairn had a first-mover advantage, starting out three years before Glenveagh joined the party in 2017. Cairn says that it was able to build 70 per cent of its existing land bank within nine months of its initial public offering (IPO). Put another way, Cairn had both the funds and a three-year jump on Glenveagh to buy up the land it wanted at a point when few dared to speculate on a recovery in Ireland’s financial-crisis-battered property market, and this continues to pay dividends today.

The second is that both have moved into build-to-rent (BTR) in an attempt to further solidify their positions as the two big names in residential development, not just housebuilding. Cairn currently has 11 BTR developments with around 2,000 flats, while delivering BTR for institutional investors is one of Glenveagh’s three business arms.

Yet perhaps the most noteworthy comparison concerns valuation. Both companies’ shares were badly hit by the pandemic, but where Glenveagh’s market value has since largely recovered, the equity market seems less bullish about Cairn. It cannot be denied that Glenveagh has achieved more since listing in 2017 than Cairn has done in the same time period, thanks in part to a bigger equity raise on debut. Yet the wide discount between the two companies seems unwarranted. Yes, Glenveagh has grown faster than Cairn and has a slightly smaller debt-to-cash profits ratio, but Cairn is no slouch. The latter is also forecast to generate better returns on equity and net margins this year. Take into account the presence of a generous dividend and the discount to book value, and Cairn looks the better pick.

The big question for both Cairn and Glenveagh is whether the boom times can continue. The market is in a similar position to the UK, where price frothiness has many worried about a crash. For the year to July, UK house prices shot up 15.5 per cent compared with a 7.8 increase for the year to June. Meanwhile, Irish house prices have increased 14.1 per cent for the year to July.

Those with memories of 2008 and its aftermath may recall that Ireland’s housing crash was deeper and more damaging than the UK’s. Although history is not guaranteed to repeat itself, the risk of the Irish housing bubble bursting is worth bearing in mind. But would-be Cairn Homes investors can take solace in the fact that the Dublin housing market, where Cairn has amassed a 17,700-unit land bank and does most of its work, appears at less risk of overheating than the rest of Ireland.

Still, the continued need for housing in Ireland should mean that, while cyclical threats may hinder Cairn, they are unlikely to throw it off course. What’s more, the housebuilder’s current gearing is not worryingly high, should negative swings in working capital require the draw down of the €118mn (£103mn) of extra liquidity that was available at the end of June. Even amid rising threats to house prices, the demand for Dublin homes means the market’s pessimism looks overdone.

Company Details Name Mkt Cap Price 52-Wk Hi/Lo
Cairn Homes (CRN) £578m 83 p 111p / 81.3p
Size/Debt NAV per share* Net Cash / Debt(-)* Net Debt / Ebitda Op Cash/ Ebitda
94 p -£200mn 1.8x 148%
Valuation Fwd PE (+12mths) Fwd DY (+12mths) PEG EV/Sales
8 8.3% 0.2 1.8
Quality/Growth EBIT Margin ROCE 5yr Sales CAGR 5yr EPS CAGR
15.6% 6.1% 61.1%
Forecasts/Momentum Fwd EPS grth NTM Fwd EPS grth STM 3-month Mom 3-month Fwd EPS change%
31% 5% -5.9% 5.8%
Year End Dec. 31 Sales (€mn) Profit before tax (€mn) EPS (c) DPS
2019 435 60 6.5 4.66
2020 262 13 1.7 0.59
2021 424 50 5.8 3.95
f’cst 2022 606 90 11.1 4.81
f’cst 2023 661 101 12.9 7.74
chg (%) +9 +12 +16 +61
source: FactSet, adjusted PTP and EPS figures converted to £
NTM = Next Twelve Months
STM = Second Twelve Months (ie one year from now)
*Converted to £

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