Henry Boot shares are in recovery mode

Despite higher prices, Henry Boot really is a very good recovery prospect, writes Mark Watson-Mitchell.

As we come out of lockdown it is becoming very apparent that investors are searching out ‘reopening stocks’, referring to companies that should benefit from the restrictions ending.

Retailing, leisure, entertainment, health clubs, cinemas, pubs and restaurants, amongst so many others, quickly spring to mind.

Housebuilding is another, as too is the whole of the UK construction industry.

Whatever you do it is important to not dismiss such ‘boring’ and non-glamourous sectors.

So, participants in these latter two sectors must not go outside of your portfolio radar.

The UK construction sector is important

Taking in contracting, services and products, the UK construction sector makes up about 7% of the Gross Domestic Product and is worth more than £110bn a year in output terms.

Obviously, the public sector is a major customer within the industry, making up 25%, while the private sector makes up the balance.

Splitting down construction activity shows that commercial and social takes up 45% of the overall business, while residential is some 40%, leaving infrastructure at 15%.

It is interesting to note that ‘new build’ makes up 60% of construction output, while the balance 40% is from refurbishment and maintenance.

Accounting for some 3m jobs, it makes up around 10% of total UK employment.

Therefore ‘construction’ merits a good position in any balanced investment portfolio.

Excellent shares for any portfolio

It may seem impossible to imagine but I am a lot younger than today’s profile company.

It is probably a name that you have seen several times before but dismissed from your minds.

However, I now consider that the shares of Henry Boot (LON:BOOT) are well worth inclusion in your portfolios, whether looking for short, medium or long-term capital growth.

Positive AGM statement last week

On Thursday of last week, this 135-year-old group, which is one of the UK’s leading and long-standing property investment and development, land promotion and construction companies, held its AGM.

The trading update that was issued for the meeting was quite bullish and, to my mind, highlights why its shares offer very good upside potential.

The £367m capitalised Sheffield-based group declared that over the first four months of the year it had continued to see its markets recover. Furthermore, it is trading on track to deliver against 2021 target expectations, while working towards medium and longer-term prospects.

The third lockdown has had minimal impact on the group’s activities. Its management has been encouraged by current performance levels, together with those growing signs of recovery. 

The company declared that it will continue to use its strong financial position to increase investments in its three key markets: industrial & logistics, residential and urban development. 

A good business mix

The group possesses a high-quality strategic land portfolio, an enviable reputation in the property development market backed by a substantial investment property portfolio and an expanding, jointly owned, housebuilding business. 

It has a construction specialism in both the public and private sectors, a plant hire business, and generates strong cash flows from its PFI contract, Road Link (A69) Limited.

In land promotion the company has some 16,600 acres, or around 88,000 plots of strategic land.

In property development and investment, it has a £1.4bn development pipeline.

As a multi-regional premium house builder, it has a 1,119-plot land bank.

Meanwhile, its construction activities centre around a full order book which is focussed on public sector work.

A neat equity

There are 133.27m shares in issue.

The board and the interests of family members have around 30% of the equity.

Larger professional investors include Unicorn Asset Management (5.13%), Fulmer Trust (4.31%), London & Amsterdam Trust (4.15%), Polar Capital (3.14%), Hargreaves Lansdown Stockbrokers (2.45%), and Standard Life Investments (2.22%).

Last year’s performance

The year to end-December 2020 saw the effects of Covid-19 on the group’s performance, with revenues down from £397.7m to just £222.4m, while pre-tax profits were down from £49.1m to only £17.1m. Earnings were 9.0p per share against 28.3p previously.

Impressively though its net cash position at the year-end was unchanged at £27m. Just two months later cash was up to £38.5m.

The group’s net asset value fell only 4p per share during the year, coming out at 235p.

Three years’ profit estimates

Current-year estimates are already suggesting £264m of sales, £29.75m of pre-tax profits, and 16p per share in earnings, amply covering a 6p per share dividend.

For next year, pencilled-in estimates are for £315m of revenue, £43m of profits, earnings of 23p and a dividend of 7p per share.

Going forward to end-December 2023, turnover of £350m, profits of £48m, earnings of 26.5p and 8p of dividend per share are considered possible.

My view

The group’s shares peaked at 342p just over a year ago. In late March 2020 they fell back to 197p, before gradually rising to the current 276p.

This is an established business inside a prominent sector of UK commerce. It has an excellent mix of activities and a strong balance sheet.

I now set a target price of 340p on its shares.