Springfield Properties Shares Sink 14% As It Warns Of Falling Profits! Time To Invest?

Springfield Properties’ share price has tanked in 2022 as worries over the housing market have intensified. It fell 14% on Monday alone following a chilly reception to fresh trading details.

At 77p per share the housebuilder was last trading 14% lower. It has almost halved in value in the year to date.

Springfield has tanked again after warning that pre-tax profit in this financial year (to May 2023) will likely fall below last year’s levels.

Cautious Approach

The Scotland-focused business entered the current fiscal year “with a strong order book and sustained demand in private housing,” it said. However, it noted that “the rise in interest rates and broader economic uncertainty have impacted reservations” for its private housing.

As a consequence the firm said it is “taking a cautious approach to expectations of future sales rates.”

The company said that it expects to report a “strong” increase in revenue for the first half and “good” sales growth for the full year. This is because of the Scottish conveyancing system which contracts buyers into purchasing much earlier in the process.

Soaring Costs

Still, Springfield Properties expects profits to still fall in part because of soaring costs.

It said that “the industry-wide inflationary pressures in materials and labour have become more acute as supply chain disruption has persisted,” adding that “7.5% inflation has been prudently applied to the group’s future costs for the second half.”

The business said too that “private house price growth is no longer anticipated in the short term,” making it harder to navigate the problem of higher costs.

Meanwhile, Springfield said that its affordable homes operations continue to be hit by the industry’s model of fixed price contracts, and that it is still avoiding entering long-term fixed price contracts as a result.

Finally, Springfield announced that plans to develop homes for the private rented sector are unlikely to come to fruition in the next two years “following the Scottish Government’s introduction of a temporary rent freeze.”

Strong Fundamentals

Springfield maintained a positive outlook for the longer term. It noted that “the fundamentals of the business and of the housing market in Scotland remain strong” and that “there is an undersupply of housing across all tenures.”

The firm said that it is “focused on maintaining tight cost control during this volatile period” and that “the historic investment in the land bank, half of which has planning permission already granted, provides the group with visibility and an excellent platform from which to take advantage of the next upturn in the market cycle.”

It added that its land bank provides opportunities for land sales in the short term.

Watching and Waiting

Monday’s fresh price collapse leaves Springfield Properties looking even more attractive from a value perspective.

The housebuilder trades on a price-to-earnings (P/E) ratio of 4.3 times. It also boasts an enormous 9.5% dividend yield.

For long-term investors the outlook for Springfield remains bright. The National Housing Federation believes the UK needs 340,000 new homes a year to keep up with demand.

But things could get much worse for the housebuilder in the short term. And this could significantly hamper its ability to pay those big dividends City analysts are expecting.

The Bank of England is tipping a recession that could last until the middle of 2024. Interest rates are also set to continue rising to curb high inflation, with a 50 basis point rise tipped for later this week.

On top of this, the problem of soaring raw materials and labour costs looks set to persist for some time. Higher costs caused Springfield’s gross margin to shrink by a meaty 110 basis points in the 12 months to May, to 16.8%.

For the time being I’d rather buy other cheap UK and US shares.