Cairn shares rise as Davy turns more positive on outlook
Davy raises profit margin outlook for homebuilder on rising house prices
A construction worker lays a row of bricks on the Cairn Homes Marianella residential construction site in Dublin in November. Photograph: Chris Ratcliffe/Bloomberg
Shares in Cairn Homes rose on Wednesday after Davy raised its price target for the Irish housebuilder on improving optimism that it will be achieve its goal of building 1,200 homes by 2019.
The company’s stock rose as much as 1.6 per cent in London to €1.2975. Davy has increased its price goal for the stock by 15 per cent to €1.48, while maintaining its “outperform” rating.
Cairn, which in June 2015 became the first Irish homebuilder to float on the stock market in almost two decades, came to the market with a target of building up to 1,200 homes a year from 2019.
While Davy analyst Colin Sheridan said there are some risks around the company’s execution of its strategy, “we now have more clarity around the group’s expansion, with five sites under construction, and another eight to go into construction.”
With Cairn sitting on 16 other core sites which can be developed in the medium to long term, which are mainly in Dublin but also include two Wicklow land banks acquired in the fourth quarter of last year, Davy now believes that the company’s target is achievable, Mr Sheridan said.
“Our previous margin forecasts now seem too conservative,” the analyst said. “A mixture of an improving land market and a strong house price inflation environment should see the company generate a gross [PROFIT]margin well in excess of 20 per cent, and we now see operating margin at 21.3 per cent in 2019.”
Irish residential prices rose 8.6 per cent in the year to November, while they advanced 5.9 per cent in Dublin, according to the latest data from the Central Statistics Office.
Global ratings agency Moody’s said this week it sees house prices increasing by a further 5 per cent this year due to a shortage in property supply and recent measures by the Government and Central Bank to make it easier for first time buyers to get a mortgage.
Davy’s new margin forecast represents a 3 percentage point improvement on its previous estimate. It sees Cairn sitting on €200 million of net cash by the end of 2020, even after paying €120 million of dividends to shareholders by that point.
The positive assessment comes three weeks after Cairn’s chief financial officer of two years, Eamonn O’Kennedy, surprised the market by saying he leaving the company. The company is scheduled next month to release its first full year of results since its initial public offering.
Davy estimates the company’s loss before tax narrowed to €2.3 million in 2016 from €37.5 million for the previous year and that it will post a €9.8 million profit this year before surging to €57.8 million in 2018.