Galliford Try GFRD Buy Rationale

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THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY.
You may have noticed that I bought some Galliford Try (Epic Code GFRD) Shares today at 1469p and I also did an equivalent sized Spreadbet at about 1462p - I did the Shares straight after the Spreadbet so it is surprising just how fast the price changed (normally I would expect the Spreadbet price to be within a few pence.)

I have gone straight in quite heavy here because I really like the GFRD business and Readers may have seen from various comments that I am generally pretty Bullish on the Markets at the moment and I want to maximise the opportunity which I think exists. I have gone for an exposure of 3% to GFRD in my overall Total Portfolio Exposure - so no mucking about.

Housebuilders tend to go well in Quarter 1 each year and I would expect Simon Thompson will be doing his Investors Chronicle article to this effect very soon - must be a great one for him to write, as a lot of it will be Cut & Paste - good luck to him. Recently Housebuilders have come right off the boil and I think this gives a great opportunity to get in now before the Q1 rush and hopefully I can pick up on the Santa Rally as well (it better happen !!).

I held GFRD for a couple of years but sold out (with a juicy profit and after nice divvys) a few months before the Scottish Independence Vote - they have operations in Scotland and I was concerned that they would be hit if the Vote went for Independence.

GFRD is a funny wee beastie, because it is a hybrid of Housebuilding (mainly as Linden Homes) and General Construction. This really appeals to me because I don’t have any of the usual Housebuilder Stocks (although I do hold a small position in McCarthy & Stone MCS which do Retirement Homes and I also have Empiric Student Property ESP - which does what it says on the tin. So I sort of have related exposure but nothing that is direct) and I also no longer hold any Construction related Stocks as I sold out of Costain COST a while back. It is pretty clear that the current Government has a huge problem with undersupply of Houses and is also trying to get loads of Road Building and Rail and other Infrastructure Projects going - so there should be plenty of work for the decent Constructions Players.

Housebuilding makes up about 54% of Revenues and Construction is the remaining 46%. I note a chunky Order Book in the Final Results from 16th September 2015 for Construction and that 90% of this year’s Revenues were secured - since then there has been a few months so I expect they are pretty much covered now. They had £17.3m of Debt at Year End - i.e. nothing much.

GFRD is FTSE250 Listed and I note they are due to do a Half Year Report on 23rd February 2016.

Recent Trading
GFRD issued an AGM Statement on 13th November 2015 which you can read here. It is all nice and positive and says in line with Expectations:

http://www.gallifordtry.co.uk/investors/regulatory-news

Greg Fitzgerald the current Executive Chairman was CEO until very recently but now a chap called Peter Truscott has arrived from a Senior Role at Taylor Wimpey to be the New CEO - it seems a pretty orderly and well managed transition so far. Greg Fitzgerald has always seemed impressive and will still be around as a Non-Executive Chairman from 1st January 2016.

Director Selling
There was a lot of Director Selling on 28th September 2015 - from what I can tell this was because they had been awarded Shares under Long Term Incentive Plans and were selling part of the Shares to satisfy Tax Liabilities which arose as a result of the Awards. The Directors all seem to have sizeable chunks of Stock - skin in the game and all that.

Website
You can find the Company Website here:

http://www.gallifordtry.co.uk/

The Investors section is here:

http://www.gallifordtry.co.uk/investors

Risks

• The obvious Risk is cyclicality - Housebuilders and Construction are really prone to Recession Risk and if we have a slowdown they could get hit hard. This is something to be careful of and at the slightest sniff of Recession it might not be a good Stock to hold. Mind you, very few Stocks do well in Recessions and of course Recessions are hard to spot in advance anyway.
• Greg Fitzgerald has always impressed me as CEO - if his stepping up into a new role means he has less influence etc. then this might not be a good thing.
• Government Policy is all over the place on Housing - expect daft things at any time !! However, politically if they want to stay in Power and get re-elected (Boy George Ozzy is very keen on being in the Top Job so you can bet your bottom quid that he will pull out all the stops to get into Number 10), then they need to keep Housebuilders on side and they need to relax Planning Laws - interesting times. Demand side factors like uncontrolled Immigration, People living alone, Aging demographics, booming birth rate, all mean more places to shelter people in are needed. It is irrelevant whether they are Homes to buy or whatever - even if everything in future will be rented, it still needs to be built.
• There is a lot of talk about Cost Pressures on Housebuilders for Brickies and Plumbers and materials (Bricks especially) but it is interesting that GFRD say these pressures are moderating (check out the AGM Statement.)
• Mortgage availability could become problematic - this is very possible especially if the Bank of England and Financial Conduct Authority actually do their jobs properly - however, Banks passed the ‘Stress Tests’ today and the Bank merely said it was monitoring the Mortgage Market situation. I suspect that if the Bank tried to reduce the availability of Mortgages it would incur the wrath of the Government - so it is in a political bind really. If Buy2Let gets constrained then I expect the ‘Corporate World’ to get more involved in House Rental - it is pretty obvious that this is the way things are going - the EU etc. hate the Little Guy & Gal on the street and are desperate to regulate them out of B2L.
• Everyone is fretting about a Rate Rise and of course sustained rises could impact Cost and therefore Demand for Mortgages. As yet any Rate Rises seem to be getting pushed back and any moves will be tiny and slow. This however is a major Risk and it might be worth dumping Housebuilder Shares before the Summer in 2016 which is when they tend to fall anyway due to usual Stockmarket Seasonal Cycles - this would hopefully capture any Q1 rise in the price anyway.

Valuation
I won’t spend hours on this - you can use the numbers from the Screenshot below to figure out the P/E and Divvy Yield etc. if you want to check them. As I see it, the figures are as follows:

Forward P/E for 2017 (next year) is 9.7

Dividend Yield for 2016 (current year) is 5.4%

Forward Dividend Yield for 2017 (next year) is 6.8%.

(these are based on my higher Spreadbet Buy Price of 1469p).

Good value I am sure you will agree. Visibility is quite good really due to the Order Book and stuff, in the absence of a Slowdown, the Revenues and Earnings Expectations look realistic.

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Targets
This is quite a difficult one because the Cyclicality of Housebuilders traditionally means they trade on quite low P/E Ratios. If GFRD was to trade on a Forward P/E of 12, then the Target Price would be 1816p.

Interestingly, the recent Highs from September 2015 were 1825p ish - so perhaps to get back up here will do nicely. It’s a difficult call, I think a Target around 1800p is good enough for now and if and when it gets up near these levels, I will need to reassess the situation. It might be more of a time thing where I just dump before the Summer Slump.

It is not inconceivable that if they can rise well in Q1, it might be possible to see 2000p or so.

Technicals
As usual, all the ShareScope Charts are as they were when I decided to Buy last night - so they are as per Monday 30th November 2015.

The Chart below is a Long Termer (remember, always start with the Big Picture first) covering about 5 years or something. You should see a very nice clear Uptrend Channel and we are just coming up off the bottom Channel Line. It’s a powerful trend and clearly in the Bulls’ favour.

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Regular Readers will know I love my ‘Breakouts’ - the Chart below zooms in a bit and you should see the Counter-Trend Channel which formed from about September up until now. My Green Arrow points out where the Price has Broken Out of the Downtrend Lines.

OK, I am a bit late here and it would have been better to have got in a week ago !!! The 50 Day Moving Average (dark blue wavy line) might be Resistance around 1500p or so and the lighter blue slower Line which is the 200 day Moving Average might be Resistance around 1600p. High Class Problem in both cases……

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The Chart below shows the Weekly Candles - I have marked a Bullish Harami 2 day Pattern (the preggers woman one) with a black circle.

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In the bottom window of the Chart below, please see the RSI (Relative Strength Index)  - this shows the Price was very oversold just recently when it was around RSI 22 (usually RSI 30 is getting Oversold) and is now rising nicely and just under RSI 50 - so lots of room to go up and if it can pass through 50 that will be very good.

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The Top Window in the Chart below shows the Bollinger Bands. The Price is up near the Top band and this might hold things up for a while - although it is quite normal for a Bullish Stock to hug the Line on the way up.

The Bottom Window shows there was a bullish MACD crossover about 2 weeks ago - I should have bought it then !!

Right, that’s enough, I need some tucker, cheers, WD.

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