One of the big long-term issues facing the UK is the relatively high cost of housing. Over the last 30 years, the ratio of house prices to average incomes has steadily risen (with a brief fall during the financial crisis) from around four to around eight, according to a study by Schroders. This is the highest level since Victorian times and mostly reflects a longstanding failure to build enough homes to keep pace with Britain’s growing population.
However, the problem is that building more homes is controversial, especially among people who live in small towns and villages, who are worried about urban sprawl. This is where a company like Harworth (LSE: HWG) comes in.
Haworth specialises in developing what are known as “brownfield” sites. This is land that has been previously developed but is no longer being used, or is being under-used, for various reasons including the failure of a project or business. Since this land was once built upon, there are fewer objections, both legal and political, to redeveloping, compared with untouched “greenfield” sites. In many cases, local residents are actually happy to have new homes and offices replacing vacant or derelict buildings.
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Harworth has built a strong pipeline
Harworth is one of the largest developers of brownfield land, with 14,000 acres of land across around 100 sites in the north of England and the Midlands. As of the end of June, it had planning permission for 38.8 million square feet of industrial and logistics space and 26,639 plots for new homes. Of course, not all of these projects will go ahead, and even those that do will take time and money to build before being sold. However, the hope is that with the new government committed to building large numbers of homes, and continued strong opposition to developing greenfield sites, the need for brownfield development will ensure that it benefits from a high level of demand.
Growth is set to take off
Like many small developers, Harworth’s growth hasn’t been smooth. Total revenue soared in 2021 and 2022, only to fall back in 2023. However, recent strong trading updates suggest that it is now on an upward trajectory, with revenue expected to rise by over 50% this year, and by a further 30% the year after. It also has managed to maintain reasonable profit margins, with return on capital employed of just under 10%. Despite this, it trades at only 6.5 times the consensus forecast earnings for 2025, with brokers updating their forecasts for both profits and sales.
Harworth’s shares have jumped by nearly two-thirds this year, and a few weeks ago it was admitted to the FTSE 250. The chart continues to look attractive from a technical perspective, with the shares trading above their 50-day and 300-day moving averages. I’d suggest going long at the current price of 190p, at £14 per 1p. I’d put the stop loss at 120p, which would give you a total downside of £980.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
