We think shares in housebuilding, construction and regeneration business Galliford Try (GFRD) are being unfairly dogged by a hit from legacy contracts earlier this year.

This creates an opportunity to invest at an attractive price in a business with credible plans to boost profit more than 60% out to 2021.

Galliford has three divisions: housebuilder Linden Homes accounts for about a third of group revenue; Partnerships & Regeneration makes up nearly 12%; and Construction which accounts for the remainder.

Linden contributed the bulk of profit for the financial year ending 30 June 2017 as Construction slipped into a loss after a £98m hit from problems on legacy contracts announced in May.

The hangover from this setback has dogged the stock with the company lagging housebuilding peers by nearly 50% year-to-date. This is despite the write-down only being worth around 8% of its market value at the time it was announced.

Galliford is now the cheapest housebuilder in terms of price-to-earnings, on a multiple of 6.4 times, and the shares trade at just a small premium to its rivals on a price-to-book basis.

Liberum analyst Charlie Campbell says: ‘The shares used to trade at a significant premium from about 2012 onwards, correctly reflecting Galliford Try’s leading return on equity, driven by the high returns from its Construction and Partnerships & Regeneration businesses, as well as its capital structure.’

Limited risk of further construction warnings

The risk of further warnings on the construction side now looks limited. This is the first such write-down for the business since 2001 and no further deterioration has been announced in the three updates which have followed the initial warning.

The company is also no longer bidding on large scale, fixed price infrastructure contracts like the ones on which it ran into trouble.

The plan to grow pre-tax profit will be delivered by increasing volumes at Linden by around 10% a year and boosting margins from 18.2% in the 2017 financial year to around 19% to 20%.

The Partnerships & Regeneration business is expected to benefit from growing demand as Housing Associations look to develop social and private homes.

The prospects for this division may also be helped by the £1.1bn of new money announced in the Government’s latest Budget (22 Nov) to support private developers in developing regeneration projects.

Galliford could be hit by the uncertain economic environment in the UK but the diversified nature of its three businesses, which operate in different markets with different customers and different funding sources, should help it remain resilient. (TS)

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