SO many building companies have raised cash to buy up housing land
lately that there must be a danger that plot values will escalate to a
level not justified by the likely level of house prices.
Now the second-largest housebuilder -- and the biggest in Scotland --
George Wimpey has decided it is now or never if it wants to secure its
future sites at reasonable prices.
It is raising #104m from shareholders through an underwritten
one-for-four rights issue at 148p.
Chief executive Joe Dwyer reckons current land prices will no longer
be obtainable even in six months time. With the contraction in the
building industry, not to mention the firms that have gone out of
business, there is certainly land to be had, but Wimpey's buying team
clearly has to get its skates on.
Wimpey is looking for more land in all areas and wants to maintain a
landbank equivalent to 2[1/2] years' output. It now has around 15,000,
which was actually almost three times the 1992 build rate of 5500.
But this was exceptionally depressed -- at the peak the group put up
getting on for 10,000 -- and 1993 production will be higher, with
analysts projecting 6500-7000. The land bought now will be sold as
houses over the next 2[1/2] years.
The housing operation has been streamlined and is now capable of much
higher sales without a corresponding increase in fixed costs. The
eventual target is to achieve sales of double the capital employed in
the business of #400m. Last year's sales were only #469m, so the goal is
a long-term one.
Wimpey Homes has seen a 55% rise to 4106 in UK housing sales in the
first five months of the year compared with the depressed level of a
year earlier. With prices stabilising and lower incentives required to
shift houses, the group is convinced that a sustainable though gradual
recovery in the market is under way.
Wimpey's strategy since Mr Dwyer came in two years ago of
concentrating on the core activities of housebuilding, construction and
minerals still has some way to go. The disposals, so far, have brought
in #300m, but there is still some #100m to #200m to come through further
withdrawal from property. The rights cash will buy time to make these
disposals at better prices, for example, when the developments are
tenanted.
Gearing was down to a comfortable 30% at the end of 1992, but debt has
since risen by 17%, reflecting seasonal demand for working capital.
The group also intends to put some cash into minerals, mainly to
modernise plant in the UK in order to lower unit costs. The group has
various quarrying interests in the Highlands and central belt of
Scotland. More investment will also be made in the US quarries.
Apart from housing, construction has also picked up, with orders 35%
ahead in the first five months of 1993. But Wimpey is not shouting about
this as conditions remain highly competitive and it does not see
recovery until at least 1995. Overseas trading remains generally
difficult, though there are some signs of better demand for aggregates
in the US.
Wimpey shares lost just 3p to 184p on the rights statement and their
recent outperformance looks set to continue for a while yet.
Smaller is
beautiful
SMALLER companies have dramatically outperformed the overall market
this year, with a 21.7% rise in the Hoare Govett smaller companies index
(excluding investment trusts) comparing with a gain of just 5% for the
All-Share.
Large companies were hit badly enough by the recession but at least
most of them have extensive export business and overseas operations
which offset some of the sharp downturn in the UK. Also, they often have
commanding market share positions which also help. Smaller companies
usually have none of this protection and have been hit commensurately
badly.
Now, however, the boot is on the other foot. Smaller companies are
more dependent on the UK economy, so those that have survived the
recession have more recovery potential as the economy recovers. Major
companies will, as a rule, have a smaller exposure to this, except those
in certain sectors, such as retailing which is largely UK orientated.
A number of smaller company funds have already been launched to catch
the trend and now two more join their ranks. Hoare Govett itself is
offering 40 million shares at #1 time in an investment trust which will
be a clone of the smaller companies trust it launched last December,
investing in over 200 stocks which are included in its index.
A more stock-picking approach will be taken by fund manager Peter Webb
of CW Asset Management, who has a strong track record as a smaller
companies specialist. He will run Eaglet Investment Trust, for which
stockbroker Greig Middleton is seeking buyers for 30 million shares. He
will aim to have 60 stocks with an average capitalisation of #20m, which
really is at the small end.
Despite the sector's strong showing this year, it still has a lot of
ground to make up, given the 43% underperformance in the four years to
the end of 1992. Over the long term, there is no doubting its superior
performance. Between 1955 and 1992 the Hoare index has shown a 18%
annual return, including reinvested income, against 14% for the market
as a whole.
Individual shares carry more risk than those of larger companies, so
it is important to have the protection of a portfolio spread across a
large number of shares.
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