The Investment Column: Redrow is on firm foundations but rate rises put shares at risk

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The Independent Online
REDROW, along with its fellow housebuilders, took the brunt of the punishment inflicted on the stock market by last week's surprise rise in interest rates.

The shares now trade at 184p, well below their 246p high achieved earlier in the year. No wonder Steve Morgan, who founded Redrow 25 years ago, is creating a sideshow by complaining about the planning application hold-ups. Given that Redrow admits it's barely affected by such problems, need he have bothered?

Mr Morgan's group has established a solid housing brand, Heritage, which has helped it deliver returns that put Redrow at the top of its sector. The brand continues to perform strongly - last year the average price of a Heritage house rose from pounds 115,000 to pounds 124,000 as it was rolled out in the south. That boosted group margins from 15 to 15.9 per cent.

The expansion of Heritage has seen Redrow lose its status as a northern housebuilder - more than half the housebuilds in the UK were in the south last year. Meanwhile, it is building up its smaller, cheaper Harwood brand. The company has enough plots with planning permission to keep it busy for three years,so investors should not be alarmed by the group's protestations about planning applications in general. There are also opportunities to strengthen the pipeline of commercial developments, which is a little thin.

HSBC expects pre-tax profits of pounds 61.5m and earnings of 20.4p per share this year, putting the shares on a forward p/e of 9. That's dear for a house builder, but Redrow's track record justifies the premium. With volumes 10 per cent ahead of last year, that record looks safe. But the possibility of further rate rises puts the shares at risk. Better buying opportunities may be ahead.