In 1932, Ben Graham, author of the Intelligent Investor (1949), posed the question: ‘Is Corporate America Worth More Dead Than Alive?’ It was the time of the Great Depression, and Graham was referring to the fact that many US listed companies were trading at prices that were below the value of their working capital alone.
Net working capital on a company’s balance sheet refers to those assets that can be turned into cash in the near-term and typically include stocks, trade debtors and cash less trade creditors and borrowings.
On the stock market, companies that have a market value at or below the value of their net working capital are often either serially loss-making or in structural decline. The Great Depression in the early 1930s was so severe on business in general that much of industry in the US (and elsewhere) was making losses and investor confidence was at a very low ebb.
The same question could easily be asked of the UK housebuilders today. Whether the peak in the last UK housing upcycle dates back to 2019 or 2021 (post the Covid bounce), most of them are priced well below their liquidation values today.
It’s easy to list off the key negatives: higher interest rates since mid-2022 and higher energy prices in 2026 have both weighed on affordability.
The net result has been an extended downturn in UK housebuilding that has seen the number of house completions decline by 21 per cent and house prices decline by 4 per cent since 2019. And 35 per cent materials cost inflation has further dampened builders’ margins. The net result has been a dip of over 50% in earnings across the board from 2019 levels. Share prices have mirrored the gloom and are off 65% from the highs (set in early 2020).
This has left the UK listed housebuilder sector trading at deeply depressed valuations. One way to value housebuilders is to simply take the value of their assets (stripping out goodwill) and subtract all liabilities. This is known as ‘tangible book value.’ The table below shows that the six major listed UK housebuilders trade on a c. 32% discount to tangible book value. These companies have historically delivered attractive returns on capital (often 20%+), so in theory they should be valued at a premium to tangible book value, not a discount.
However, even tangible book value fails to recognise the fact that housebuilders have some unique attributes. Almost all of their assets are realisable in the near-term and weak consumer demand is demand deferred, not cancelled.
Taking the specific example of Barratt Redrow, someone could buy the company in its entirety today and built out its existing landbank (without replacing it). This would realise £11 billion of cash profits over the next 4-5 years, even after paying back all liabilities. That works out to about £7.73 per share, compared to a recent share price of £2.55. In other words, Barratt Redrow trades at a 67% discount to this estimate of liquidation value. As we can see from the table below, this issue is not restricted to Barratt Redrow – the entire sector trades on an average 61% discount to liquidation value.
It is true that the near-term outlook for the UK housebuilders is cloudy. Yet, the long-term outlook is surprisingly bright. At the heart of the issue sits a structural supply shortage of homes. In the affordable housing segment alone, there are 1.5 million people on the social housing list.
The UK government is well aware of the issues, and has medium-term plans to build 300,000 homes annually, compared to 171,000 homes completed in 2025. To support this, the UK’s planning laws have been amended, which should free up land for development, and the government has committed £39 billion of funding to affordable housing.
Housebuilders, by their nature, have the flexibility to defer land plot purchases in a downturn – boosting cash flows in the near-term – and wait for lower land prices, which embeds improved margins for the years ahead. And unlike the period leading up to the Global Financial Crisis, when the UK housebuilders in general were carrying debt, today most of them are sitting on net cash and are, therefore, well placed to ride out this extended downcycle.
It’s always darkest before the dawn and times of great uncertainty generally offer up great values. This was the case in 1932 for the whole of the US stock market when Ben Graham provided his great insight. Perhaps in time we will say the same about the value on offer today in the UK housebuilders!
Investment clients of GillenMarkets interested in getting some exposure to the UK housebuilders should talk to their advisor.
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