Residential Market comparison of Two companies
...is dominated by a small number of major companies, each with an annual output of 500 units or more. In 2000, there were 43 such companies in the UK who together accounted for almost 71% of all the homes built by the industry (Wellings, 2001). Earlier figures from the NHBC’s Private Housebuilding Statistics, reported by Nicol and Hooper (1999), indicate that in 1990 there were 32 companies starting 500 or more units who together claimed a 41% market share, while the returns for 1980 revealed only 24 such companies with a 39% market share. Nicol and Hooper (1999) therefore contend that there has been a long-term trend towards increased concentration of housebuilding capital, at least in terms of unit output. Table 1: Top 10 Housebuilders in 2000 Unit Completions Turnover Profits Rank No Rank £ million Rank £ million Wimpey 1 11437 1 1254 2 142.5 Barratt 2 10636 2 1165 1 150.0 Beazer 3 8223 3 841 5 104.0 Persimmon 4 7035 5 742 4 116.0 Bellway 5 5714 6 634 8 95.6 Westbury 6 4435 10 476 13 60.8 Wilcon 7 4215 9 571 9 78.6 Alfred McAlpine 8 4007 11 463 14 53.7 Bryant 9 3961 7 594 7 98.1 David Wilson 10 3604 8 569 6 103.5 Totals 63267 7309 1002.8 Source: Wellings (2001) Those companies completing an average of 2,000 or more dwellings each year are often termed volume or mass housebuilders. In 2000, there were 14 such companies in comparison with 8 in 1990 and only 4 in 1980. The market share of the top ten builders by unit output, which in 1990 had stood at 26%, rose inextricably throughout the decade and was estimated to have reached 44% by 2001 (Wellings, 2001). Although other measures of market share such as turnover or number of employees may also be valid (Monk, 1991), unit output has been widely used to assess the growing concentration of capital in the industry. Indeed, as Table 1 shows, eight of the top ten housebuilders by unit output in 2000 re-appear in the top ten rankings by both turnover and profitability for that year (Wellings, 2001). Although there may well be important regional or local variations in the extent to which housebuilding is dominated by relatively few companies (Gibb, 1999), it is apparent that, at a UK level, the industry is becoming more rather than less concentrated. There is a major problem of under-supply of housing in the UK. Whilst housebuilding overall is at its lowest level for many decades, private housebuilding has remained at a very steady rate of around 150 000 per year over the last 30 years. The rapid decline in housebuilding levels is primarily due to the collapse of the social and affordable housing programme. If increased housing provision is to have any impact on house prices and hence affordability there would have to be a sharp increase in supply over at least a decade or more. House prices have increased most rapidly in areas of high demand but large increases have been seen too in many areas of relatively low demand. The key issue is affordability. The market provides for those who can afford to buy at current price levels but in many areas there is little alternative for those who cannot. So affordable housing is the key to future housebuilding. There are many ways in which the planning system can be improved but planning constraints as not seen as a decisive factor over the longer term in stifling housing provision. The major growth areas in the South East such as Thames Gateway are likely to do little to ease affordability problems in London. Moreover, they will only work if major new infrastructure is provided and better understanding is gained about how to create new housing markets and sustainable communities. Greater integration of housing, land use planning, transport and economic development strategies are needed particularly at sub-regional and city region level. The Government policy is moving in this direction. The housebuilding industry tends to be very cautious, suffers from capital and skills constraints and operates in an environment where competitive pressures have reduced. It can deliver market housing but has little interest in providing affordable or social housing. It is currently a very profitable sector but has been reluctant to increase output even at a time of rapid house price inflation. ASSUMPTIONS A number of assumptions have been made in carrying out this report. They are as follows: • Data and useful information is collected from company annual reports and accounts downloaded from their official websites. • FAME database is avoided due to its slight inaccuracies, however, data for trading year 1999 is not available from Mowlem’s website, so FAME was briefly used to cover that gap and offer the reader better understanding. • The author has decided to analysis ratios in the past 5 years starting from 2003. The reason why 2004 is missed out because again, data has not been made readily available for that year. • Any information used in calculating the ratios is placed in the relevant Appendices and the reader is referred to that for better understanding. RATIO ANALYSIS This section contains results and comments on ratio analysis calculations for both Mowlem PLC and Redrow PLC. Conclusions, observations and recommendations will be drawn from the comparison of the financial analysis information of both companies. The aim is to provide the reader with an overview of the financial performance of the two and to also outline their financial position compared to each other. One way to put the figures into an understandable image, ratio analysis is used. It assists by converting raw and arguably meaningless isolated figures into a meaningful ratio or percentage. This will allow ease of comparison current and previous years’ trading with that of other companies. Profitability ratios Table 1: Operating Profit Margin (%) Marlow plc Redrow 2003 24.6 18.8 2002 19.0 16.6 2001 18.0 19.0 2000 11.0 16.8 1999 29.0 16.6 This is one of the key motives for a company being in business. Any company has to make profit otherwise why go in business, costs need to be covered and annual growth should always be an aim. Both companies generated profits steadily over the years up to 2003. Mowlem is doing slightly better, because of the size of the company and secondly, it offers a range of services to its clients where as Redrow is only involved with house building. Table 2: Return on Capital Employed (%) Marlow plc Redrow 2003 21.4 25.9 2002 17.6 30.8 2001 14.9 25.9 2000 11.0 25.9 1...