Cautious Beazer reaps benefits

Notwithstanding further gloomy comments about the housing market yesterday, Beazer Homes, now the UK's second-largest builder, is better placed than most. Unlike less focused recent entrants to the industry, the company has been cautious in extending its land bank which, at approaching three year's sales, still only averages out at a plot cost of 17 per cent of last year's average selling price.

The advantages of specialisation shone through in yesterday's preliminary results for the year to June. The figures were complicated by the group's flotation out of Hanson in March 1994 and a changed year end, so pre-tax profits of pounds 55.7m for the latest 12 months compared with pounds 33.9m in the previous nine months. But the underlying 23 per cent increase was sparkling by comparison with Tarmac, which has tired of its house-building side sufficiently to put it up for sale.

An effective 5.5 per cent rise in the dividend is also an expression of the group's strength. Despite a fall in net cash balances from pounds 95.8m to pounds 48.5m, the group still has one of the strongest balance sheets in the business.

The figures were flattered by last year's acquisition of John Mowlem Homes, which chipped in pounds 1m to profits and added 837 to completions. That helped sales hit a new record of 6,679, an underlying rise of 9 per cent and still some way short of chief executive Dennis Webb's informal limit of 8,000.

Mr Webb is level-headed about the market's future, highlighting the sound long-term fundamentals despite the current pessimism. But he recognises that the 15 per cent fall in reservations since June will not be recovered this year, particularly given 400 or so fewer social housing sales by Mowlem.

And despite a continued move up market, Beazer is having to give more away to gain sales. Incentives have already risen from below pounds 3,500 per house on average to close to pounds 4,000 in the past year and will have to rise further. Mr Webb warns that could hit margins to the tune of 1-2 per cent going forward, more than wiping out last year's half-point gain to 13.9 per cent.

That said, Beazer, with its strong national franchise and reputation for not over-paying, should be able to cash in on the current consolidation of the industry. Profits of pounds 49m this year put the shares, unchanged at 145p, on a prospective multiple of 12. They are worth holding for the upturn, although they will have difficulty breaking through last year's 165p issue price until current shareholders bale out.