Eager Beazer puts faith in Church; The Investment Column

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The Independent Online
Beazer Homes' pounds 35.7m deal to buy Charles Church, the all-but-failed upmarket housebuilder, looks pricey on the face of it. Now the UK's third- largest builder, Beazer believes it has done well to pick up such a good name for a mere pounds 3m in goodwill and in just the area of the market where it has stated its intention to expand.

But that goodwill calculation would have been higher had Beazer not increased the value its puts on Church's assets. It also assumes that the pounds 9.8m value ascribed to the 6,500 plots without planning permission in its "strategic" land bank is anywhere near accurate.

Whether those values are right or wrong, the short-term returns on the sale look set to accrue to the Royal Bank of Scotland rather than Beazer. The bank converted from being the group's leading lender to its owner in February after buying out the nine other banks in the lending consortium in a deal worth pounds 13.6m. Even adding back the pounds 14.5m in (written-down) loans it had sunk into Church, the Royal Bank appears to have made a decent turn on yesterday's sale.

By the same token, Beazer is not buying the same group which in the 1980s was a by-word for luxury homes in the South-east of England. The sudden death of its eponymous founder in 1989, combined with five years or so of recession, have clearly taken their toll on Charles Church. At its peak in 1988, the group sold 575 houses at around pounds 500,000 apiece to return profits of pounds 18m. By contrast, in the year to last August Church sold 193 units and made pounds 4.1m before interest charges of around pounds 3m, and Beazer concedes that trading has deteriorated somewhat since then. Perhaps the most telling feature of the group's decline is that the average selling price had tumbled to pounds 180,000 by last year.

That said, Beazer's contention that the past should be no guide to the future carries some weight. The deal, which it claims will be earnings- enhancing, includes a three-year landbank and a company making an operating margin of 11.8 per cent, well up with the best in the industry and Beazer's own margins.

More importantly, despite its decline in recent years, the brand name remains strong in the South-east and should provide a strong platform for Beazer's ambitions to roll it out across the country. The aim over the next four to five years is to grow Church back to the level where it is again building between 500 and 600 houses a year. And as the rich get richer, this area of the market should see significant growth in the future. In the meantime, though, the shares, unchanged at 195p, are up with events on a forward p/e of 16 until the outlook for the housing market becomes clearer.