Cairn Homes is Ireland’s leading homebuilder with a focus on the Greater Dublin Area and other major urban districts around Ireland. Cairn, established in 2015, has scaled in the last seven years and is now active in 20 sites nationwide ranging from starter homes to luxury apartments. Cairn, along with Glenveagh Properties, operates in a duopoly in the listed Irish homebuilder’s market.

In early June, we added the stock to our Analyst Conviction List (ACL) given the company’s resilient performance over the last year, coupled with our bullish views on the homebuilder’s growth prospects going forward, given the extraordinary need for a greater supply of homes in Ireland. The market appears to finally recognise the value we see in the company, the share price is up almost 41% since its lows in early September and is up 31% YTD, representing a considerable outperformance on the wider Irish market which has increased by 19% in 2023. In addition, since we added the stock to our ACL, the share price has increased by 10%.

In terms of Cairn’s operating performance, management released a brief trading update in early May in which it which it announced that it had a forward sales pipeline of 1,905 units with a net sales value of €685m (up from 1,503 units and €534m on March 1st). Management was also pleased to have closed its first transaction with the Land Development Agency consisting of 152 units in Wicklow. The company has reaffirmed its full year guidance of sales in excess of €650m and a gross margin of c.21%. Management also guided that build-cost inflation is likely to be around €10k (4%) per new home built and commented that the significant increase of building homes in Ireland is likely to continue with additional labour and material costs unlikely to unwind.

We do acknowledge that there is an element of political risk surrounding the general election approaching in March 2025 which is a potential headwind for homebuilders in Ireland. However, we believe Cairn Homes is also in the position to benefit from any further steps that the current government may take between now and the election similar to its decision to discard development levies announced in early May. Development levies, which were in place to pay for infrastructure in the locality of a new home, will be scrapped, saving an estimated €12.6k on average per new home built.

The Irish housing market, as a whole, started off 2023 brighter than expected, with completions in Q1 19% higher than Q1 2022. However, it is expected that the overall number of house completions will decline in 2023 with the Banking and Payments Federation forecasting c.27,000 completions versus c.30,000 in 2022. As a result, housing supply in Ireland looks set to remain well below what is required to satisfy demand and the government will be under continued scrutiny to provide solutions to this problem.

Furthermore, the dysfunction in the Irish housing market was further illustrated by the recent figures which showed that house prices in the state increased by 3.6% YoY in April, the lowest yearly increase since 2021. The figures also signalled a drop-off in transactions in April which is a clear indication that rising mortgage costs eliminating some buyers from the market.

This dysfunction, however, does not appear to appear to have negatively impacted investor sentiment for Irish homebuilders. In fact, Cairn’s share price (up 31%) is performing largely in line with its domestic counterpart, Glenveagh Properties, which has also had a stellar year. Nevertheless, Cairn remains our preferred play in the sector due to its superior margins, its relative success in navigating the difficult planning system in Ireland, and the fact that it provides investors with a healthy dividend. In addition, importantly, from a valuation perspective, it is currently very attractive. At 9.5x FY23 PE, it is currently valued at a 30% discount to its 2-year average and a 38% discount to Glenveagh. This discounted valuation appears too onerous given its history of resilient performance through difficult market conditions and dominant position in the under supplied Irish housing market.