Springfield’s Deal With Barratt Could Prove Pivotal

I think that the deal this Scottish-based housebuilding and construction group announced a week ago could prove to be a major pivot.

Taking a medium-term view I also consider that the group’s shares are undervalued at the current 96p.

The company, which is a leading housebuilder in Scotland focused upon delivering private and affordable housing, has entered into a strategic collaboration agreement with the principal operating subsidiary of Barratt Developments (LON:BDV), for the development of the Springfield’s Durieshill site.

Mega New Home Project

The aim is to create a new standalone sustainable village near Stirling, with planning in place for 3,000 private and affordable homes alongside new schools, local shops and other business opportunities, community woodlands and greenspace.

The Durieshill project, spanning nearly 600 acres, is within commuting distance of Edinburgh and Glasgow, and is the largest detailed planning application for housing development to be approved in Scotland to date.

Barratt will, in consideration for half of the land at Durieshill, provide and fund the infrastructure development for the entire site, expected to be over the next five years, and has made a cash payment of £10m to Springfield.

Importantly the provision by Barratt of site infrastructure will significantly accelerate the development of the site, whilst eliminating Springfield’s requirement to tie-up capital for the next five years.

The sale of the land to Barratt, as part of a new 50:50 strategic collaboration between Springfield and Barratt, will reduce the group’s debt by more than its previous guidance and should contribute to planned growth in the medium term.

Springfield has received £10m from the profitable sale of the initial 34 acres of land.

The remaining land will be exchanged for the provision of site infrastructure over the coming years as development milestones are achieved.

The cash proceeds from the profitable land sale will contribute to reducing Springfield’s debt, which is expected to have stood at around £41m as at the end of May, which is considerably lower than its previously stated target of £55m.

CEO Innes Smith stated that:

“We are delighted to collaborate with Barratt on this exciting project at Durieshill.

Our shared values and goals in constructing quality homes and fostering sustainable communities, combined with Barratt’s five-star reputation, will offer customers increased choice and accelerate delivery in this premier development.

We are eager to work with Barratt to establish a thriving village at Durieshill.

Due to the substantial size of this site, this partnership marks a significant milestone for Springfield, emphasising the worth of our extensive land holdings with planning permission in sought after locations throughout Scotland.

The infrastructure support provided by Barratt in this collaboration will enhance Springfield’s growth prospects in the medium term, minimise risks and optimise our return on capital.”

This village project has been a vision of Stirling Council for over 20 years, with Springfield working closely with them to design a place that meets the wider requirements of the city.

Initial groundwork, which will commence later this year, is expected to create over 200 new jobs, apprenticeship roles and opportunities for the local supply chain.

Durieshill is expected to have a Gross Development Value of some £776m.

Barratt’s regional managing director Douglas McLeod stated that:

“New homes, whether they be affordable, for first time buyers, or for experienced buyers, are in huge demand across Scotland, so we are very excited to be a partner in the development of this transformational new community serving the Central Belt.

The provision of quality homes in this underserved area will not only offer much needed choice to local home seekers, it will support local employment and create demand for new amenities and services too.

This is why we are investing so significantly in crucial infrastructure to serve the area, as well as making provisions for schools, shops and community spaces.”

The Equity

There are some 118, 669,124 shares in issue.

The largest holder is Chairman Sandy Adam with 33.14% of the equity.

Other large holders include BGF Investment Management (7.26%), SFM UK Management (5.52%), Janus Henderson Investors UK (5.17%), Canaccord Genuity Wealth (5.11%), JM Finn (1.27%), Innes Smith (0.83%), IG Markets (0.83%) and Hargreaves Lansdown Asset Management (0.77%).

Broker’s Views

Greg Poulton, analyst at Singer Capital Markets, rates the group’s shares as a Buy, with a 137p Price Objective.

For the year to end May 2024 he estimates revenues of £292.8m (£332.1m), while adjusted pre-tax profits will have dropped by over a third to £10.0m (£16.0m), easing earnings to 6.5p (10.4p) per share.

However, for the current year he foresees £263.0m sales, £13.5m profits, 8.3p earnings and a 1.50p dividend against nil for the last two years.

Hannah Crowe and James Tetley at Equity Development have a Fair Value of 140p on the shares.

They have revenue estimates of £287.2m for the last year, £10.1m profits, and 6.4p earnings.

For this year they suggest £270.4m worth of sales, £13.0m profits, 8.0p earnings and 1.5p dividend.

Alastair Stewart at Progressive Research, the analyst who first alerted me to the value of this company, has £281.1m sales for last year, with £272.5m for this year, while profits go £10.3m and £13.0m, with earnings of 6.4p then 8.1p respectively.

He also goes for a current year 1.5p dividend.

My View

Considering its high-quality land bank and its reducing debt position, with further land sales expected, together with a very well-funded partner on the Durieshill project – Springfield Properties is a good medium-term investment into the Scottish residential property market.

In the middle of last October, the shares of Scotland’s only quoted housebuilder were traded at a lowly 50p, by mid-March this year they were up to 105p.

They peaked at 161p less than three years ago and closed last week at only 96p, valuing the group at just £114m.

At around this level the shares represent a good tuckaway, awaiting the expected big housing upturn.

I remain confident of my previously set 120p Target Price.

(Profile 05.03.19 @ 114p set no Target Price)

(Profile 26.10.22 @ 92p set a Target Price of 120p)