Davy lowers revenue forecasts for Cairn as house price growth dips

Davy has lowered its revenue forecasts for construction firm Cairn Homes, citing a lower rate of house price growth in Ireland in the next two years.

However, analysts said an improvement in gross margin meant any impact on profit expectations was limited.

In a note, Davy said it had cut revenue forecasts for 2019 and 2020 by 1 per cent and 2 per cent respectively as house price growth reduced from 5 per cent to 4 per cent.

However, gross margin for both years was up, and overall operating profit forecasts are broadly unchanged for 2019 and only 1.6 per cent lower in 2020.

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The most recent figures from the Central Statistics Office showed residential property prices rose at an annual rate of 4.3 per cent in February, the slowest pace since 2013.

Prices in Dublin rose at an annual rate of 1.4 per cent in February, with houses rising 1.1 per cent and apartments up 1.8 per cent. Analysts have speculated that the soft patch is “a temporary blip” rather than the start of a new dynamic in the housing market.

Business model

However, Cairn’s business model concentrates on new homes, which it says have trailed prices in the wider market in recent years. The company is holding enough land to build 15,000 homes.

Shares in Cairn were trading at €1.30 at 12.18pm in Dublin. The company lost more than 40 per cent of its share value last year, but has rallied from its late December lows, helped in part by the prospect of sizable cash returns to investors.

In April, co-founders Michael Stanley, Kevin Stanley and Alan McIntosh raised €22.78 million by selling 17 million of the shares in the company they had bought since its 2015 flotation. The three men have agreed not to sell their remaining shares for a period of six months, subject to certain customary exceptions.

"Our recent report established a minimum expected level of shareholder returns in the next three years that would average over 9 per cent in that period," Davy analyst. "We note the recent High Court approval to increase the level of distributable profits, and this is a meaningful waypoint on the road to these returns. We expect further catalysts to arrive over the course of 2019 as the size, timing and nature of the returns become clearer."