UK Homebuilders with Christian Olesen from Olesen Value Fund
Summary
Core Thesis: Bullish on UK homebuilders as a cyclical recovery play, with a primary focus on Bellway (BWY) due to attractive valuation and conservative management.
Valuation Upside: Bellway trades below tangible book (~0.9x) despite mid-teens through-cycle ROE, with potential rerating to ~1.5x book as demand normalizes and book value compounds.
Demand/Supply Dynamics: Rate-driven demand drop created cyclical weakness, but long-run UK housing demand is inelastic and underpinned by population growth; focus is outside London where affordability is more reasonable.
Industry Quality: Post-GFC discipline has improved with more rational land buying, healthier balance sheets, and reduced bidding wars, limiting downside risks from land write-downs.
Capital Allocation: Bellway introduced a capital framework featuring buybacks and modest leverage (target 15–20% net debt to capital) to improve asset turnover and shareholder returns.
Policy Tailwinds: Planning reforms and potential demand-stimulus programs could lift volumes; UK equity pessimism and foreign interest provide a rerating setup.
Peer Insights: Persimmon (PSN) runs a lower price-point model with structurally lower land costs and strong returns; James Latham (LTHM) is a quality wood panels distributor leveraged to RMI demand.
Risks: UK macro weakness and low consumer confidence persist, but downside appears limited given asset-backed books, low leverage, and diversified geographic exposure.
Transcript
You're about to listen to yet another value podcast with your host me, Andrew Walker. Today's podcast is a really interesting one. I have Christian Olsson from Olsson Value Funds on. He is going to talk about the opportunity in UK homebuilders in general and Bellway in particular. I think you from a just quantitative value perspective. I think you're going to be really interested in this one. Look, I mean to cut to the bottom line, UK Belway is trading below tangible book value and they do like kind of mid- teens roe through the cycle. Those two statements do not belong together. So, you know, please consult financial advisor, not financial advice. We're going across the pond, so that carries all sorts of risk and due diligence, all that. But I think it's a really interesting podcast and we're going to talk home builders in particular. We're also going to talk about the UK market more broadly. Think you'll learn a lot. 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Uh really excited to talk about a a idea I followed off and on for the past couple years. Uh but before we get there, quick disclaimer, remind everyone, nothing on this podcast is investing advice. always true, but maybe particularly true today because as you'll hear in a second, we're talking about an international market which carries, you know, kind of hiding risk for any of my domestic listeners. And, you know, it's a UK market. So, I might say it's a developed market. I kind of think the UK is an emerging market at this point, but neither here nor there. Anyway, Christian, the reason I reached out to you, you wrote up in, I believe it was your Q3 letter, you had a write up on just the UK home builders in general. And this is a space that I've been interested in cuz again as I said the UK is I think it might be the cheapest market and maybe the most inefficient market of kind of the larger Western European markets on the planet. So I'm just interested overall and I'm interested specifically in the UK home builders. I am rambling. I'll toss it over to you. We're going to discuss the UK home building market. I'd love to just start with your overall thesis and then we can dive in from there. >> Yeah. Um yeah, thanks for having me on, Andrew. Um um I think you're you're totally right. The UK market is definitely one of the cheapest stock markets out there. I actually have more than half of Value Fund's portfolio in UK stocks at this point and um we have a a big industry exposure to the homebuilders in the UK. Uh we currently have three positions. Um my favorite in this sector is Bellway. Um, and um, yeah, I I think that the UK home builders are just um, I I think it's a great setup. I think there's, you know, they're quantitatively cheap. Uh, I think there's lots of upside. Um, most of these businesses are really good long-term compounders of value, even on a per share basis. Um, and I think that for a long-term investor, um, there's very little downside in in some of the UK homebuilders, especially Bellway. Um, so I think, you know, on a risk return basis, um, uh, I I think it's really especially attractive. And so, you know, we have a big exposure to the to the sector and and we can really do that because like I said, I think there's very little downsides uh if you're a long-term investor. That's a great way to frame it. I I I want to dive into a few things there, but let me just start Well, let me start with my favorite question because I I do think it helps frame every conversation. The market is a really competitive place. What are you seeing in the UK homebuilders in particular that kind of make this a risk adjusted alpha opportunity? >> Yeah, so I think really um this opportunity it's you know why does it exist um and you know what's the bare case uh and what do I see in it um that others maybe don't but you know I think it's actually a pretty simple setup. I think it's it's really a cyclical recovery story. I don't think there's really much of like an intelligent bare case uh for the UK homebuilders, especially the higher quality ones. If you're a long-term investor, um I think um you know the the setup is is is pretty you know sort of stereotypical for a cyclical. Um you know we have an industry where demand is volatile uh and supply adjusts much more slowly than demand. Um and unlike from the US where we sit uh when interest rates went up around 2022 the demand for new build housing in the UK dropped uh very significantly. So uh I think Belway's completions are down maybe round about 35% or something like that compared to before the drop in interest rates. I'm sorry before the increase in interest rates. Um whereas you know in the US we've we've seen a different story. We've seen a much stronger markets. Um so um you know that's really why the stocks in the industry sold off. uh back around 2022 and and why they remain cheap. Um and I I think you know maybe you can you can add to that that um um you know investor sentiment in the UK has been quite pessimistic for a long time and um you know homebuilder stocks you know they they have not really recovered to anywhere near their sort of historical average levels in terms of the multiples they trade at. So I think it's really pretty simple you know uh pretty big drop in demand um um pretty fixed supply um and as a result the market has just sold off. I I have some questions that some questions of push backs I'm excited to get to you but maybe I think the best place to start might be let's just frame it. You mentioned Bellway a few times and I don't think the stats look dramatically different from one to the other. So you can give it overall are Bellway specific, but maybe we could just frame the I I think what attracts you probably rightly is, hey, you have this uh cyclical home builder that's trading on every quant metric very cheaply. Maybe we can just frame the quantitative cheapness of it just to kind of set the stage. And I, you know, spoiler alert, I listened to a presentation you did on it and you kind of talked about the value you saw, you know, if it kind of mean reverts over the next, maybe we can also use that just to show the upside that people are playing for as well. >> Yeah. So, Beltway as of today trace at 89% of tangible book value. Um, historically, depending on how far back you go, it's been about like one and a quarter 1.3 times tangible book. And actually I think that's too low. I think the intrinsic value is at least one and a half times tangible book and it has traded you know above one and a half times tangible book in the past. Um and um and you know they're still making money. Uh the value is compounding uh and so the value is growing while you hold it and in addition you'll I think you'll see a multiple rerating over time. Um, and this is uh this holds true for pretty much all of the UK homebuilders. There are some differences there. Um, I would also just add that, um, Bellway and certain of the other publicly traded home builders in the UK, and I think that's eight or nine of them left at this point. Um, many of them are really excellent long-term compounders of per share value. Um, most of them have a very good balance sheets. Uh, Belway has almost zero net debts uh, currently, although that will probably go up a little bit because they're starting to buy back shares and and be a little bit more proactive with their capital allocation. Um, so, um, I I think, you know, it's the type of business where you don't really have a big risk of a permanent loss of capital even though it's in a very cyclical business. Um, so you know, I think it's it'll just compound over the cycle and it's really just a matter of being patient and waiting for for the multiples to rerate. That's a that was a perfect overview. So let let me try to give a few push backs. I guess my my main push back and I'm not even saying these are push backs, you know, this is just me is stress testing the the case. It is a UK home builder, right? And it is tied to home building. Ultimately, the value of the homes at some point is tied to the economics of the UK. And the UK to my untrained macro eye looks like a kind of disaster. And you know, I everybody says, "Hey, you know, the best way to get rich in America is to buy a house with an 80% mortgage over the long term." That's generally true, but you know, I I always joke, you think about the people who bought houses in Detroit in the 1980s and the city kind of went to heck as all the auto manufacturers went way downhill. I don't think they did that well on their home purchases and like I guess my first push back to you is given the fiscal situation in the UK, you know, I I think you've seen a lot of wealthy people fleeing. I is this is buying a UK home builder like 0.89 times price to book that relies on the book being reliable. If the book is made up of in my case Detroit 1980s land like that that book's going to get cut. So I guess my first push back would be hey are we looking at something where the macro headwinds kind of overwhelm the the general cyclicality and kind of historical quantitative metrics you've talked about? >> I don't think so. I mean, I think that fundamentally the demand for housing in the UK in the long run is quite solid. I think it's underpinned by, you know, population growth and probably a little bit of growth in GDP per capita over time. Uh, you're right that currently the UK economy is pretty weak. It's, you know, pretty close to recession. is you know roughly zero growth and consumer confidence is is quite low currently actually. Um but I think um you know a few um I mean I I I would not compare the UK to Detroit um you know Detroit saw a massive decline in its population uh because of the decline in the auto industry. No, I you know I'm just speculating. I I don't disagree, but we have seen like a lot of the finance industry left post Brexit and it's not lost on me like one of the ways cities and states go downhill is you keep shooting yourself in the foot and from an outsider view seems to me like you know the UK has shot itself in the foot for the past 10 years basically. Yeah, >> I I mean I think that's um I I I think that overstates it actually. I think you're right that economic growth has been pretty weak in the UK. Uh but I wouldn't call it a disaster by any means. Um I I just don't see that in the numbers. Um you know it's an economy that I think will continue to grow albeit perhaps slowly. Um and um and I think you know if you look at the decline in the demand for new build housing that we've seen uh in the last three years or so uh it's um you know it you know in the long run I I think demand almost has to rebound. Uh you know we we've seen a huge decline in demand. Um and that's really because you know when people see uh I would say in large part it's because when people see this big increase in interest rates where whereas you know in the UK you might have bought a home at a you know one and a half% interest rate or something like that I've gotten a a mortgage at a one and a half% interest rate four years ago. Now it's maybe four and a quarter percent. uh at one point it was it was higher than that you know it's quite a sticker shock um but over time I think uh like I said the demand for for housing I think it's pretty price inelastic in the long run because housing is a basic need with no substitutes um and I I think people will will pay what what they have to pay uh for housing. Um so uh and and we I think we've seen that historically you know uh demand for housing especially new build housing is just really cyclical. you know, you can see that time after time after time if you go back decades uh and look at the historical data. Um, and I think this is just another example of that. you know, just on that cyclical demand and everything he said, I don't know if there's a bull case or a bare case, but as I said, I I have done some work on the UK home builders and it's funny if you reach out to the RR teams, this is just my anecdote, so I'm not suggesting this is 100% verified or true code, but in general, when I've talked to them, they've kind of suggested to me like, hey, the domestic, and I mean domestic as in the UK domestic interest in our stocks is nothing. most of the outreach is coming from American you know generally American but kind of international people who are interested in in us for all the reasons that you you are laying out right like we are quantitatively cheap we're at the bottom of the cycle all that sort of stuff I don't know if that's a bull case or a bare case but I find it interesting when they're like hey domestically people are just you know they vomit in their mouth a little bit when they bring us up but internationally the value investors are coming for us and we're you know the history's been popular with American investors all these. But I I find that interesting. Not saying there's signal to the noise there, but I just find that interesting. I'll toss it over to you. >> I I I think you're definitely on to something. Um, you know, I think it speaks to how out of favor UK stocks are and UK homebuilders are in particular. Um, and just also just how little value is left in especially the US stock markets and and maybe also in certain other places around the world and just how cheap the UK stock market is. So let me ask this before we go through many of the different ones. How much of this is just a quantitative bet for you? Right. This is I'm just going to use bellwe again trading at 0.9 times book and historically roe are in the low to probably closer to the mid- teens like through the cycle. So when you something that does mid- teens ROE should probably trade closer to two times than 1.5 times book and you're saying hey I'm getting it for 0.9x and this is a great quantitative bet and by the way low low debt all that sort of stuff versus how much is this is a qualitative bet to you where you kind of more look at the overall UK landscape and say hey you know it is short of housing there there all the housing trends that have kind of come to play in the US over the 10 past 10 years the UK kind of ex experiencing the same things and you look at you know each government's coming in and saying hey we're going to we're going to build new housing so how would you weigh just like the quantitative versus qualitative there >> so I think you know it is also very qualitative but but in a different way than what you suggested and and I can talk about that that thesis that you you mentioned with the sort of chronic under supply of housing in the UK which is absolutely true I just don't think that's really going to change very touch. Um but it's it's qualitative uh especially for a company like Belway uh in that if you study its history um going back a few decades actually and and maybe especially how the company performed uh during the great financial crisis. I think you really see a a a company and a culture that's um um very conservative and and has simply been able to compound per share value um very nicely over the very long run. I mean this this is a a good long-term compounder. It's not like say NBR which is a US home builder that has you know a particularly capital light business model uh and which has done phenomenally well also in part because of its massive stock buybacks. It's not like that. Okay. But um I think it's it's a really solid uh really solid business. I think also it you have to really sort of look under the hood a little bit and and look at you know what are the risks when you invest in a home builder and I I think I'll I'll touch on two two sort of qualitative things as well there. One is about the the land market and the other one is home prices in the UK. So um let's take home prices first. Um and and I think this is actually quite important if you're going to invest in UK home builders in my opinion. Uh there is uh quite a divide between London and the UK excluding London. Um home prices in London went up a lot after the financial crisis up until around Brexit in 2016 and then they've remained pretty high but you know relatively steady since then. and and London is just really really expensive. Um I would worry if I was invested in in a home builder that had exposure to London, I would be worried about, you know, potential drop in prices in London. Uh I I wouldn't say I'm forecasting that, but I think that's definitely a risk. Um, you know, if you think about the home building business model, you know, it's really like a a manufacturing business where you have very substantial inventory gains or losses because you hold the inventory for so long, especially the land, right? About, you know, the inventory quote unquote is really land and work in process. About twothirds of it land, one-third work in process. Um, and so if you buy land, um, uh, under the assumption that home prices are going to be, you know, what they were when you bought the land, for example, what you thought they were going to be, but home prices drop, say, 20%. Um, you're going to have massive write downs and you're going to lose a lot of money. >> This is the Detroit worry I had, right? You've got you've got the land you're you're Detroit in the 80s and then by the 2002s it's like well hey that land is worth 30% less and inflation's gone up 20%. So woo that's a really big write down. Yeah, it's a it's really the key risk uh if you invest in home builders and and I think you know maybe especially if if you look at how most of the US home builders did, I think probably every single one of the publicly traded US home builders, you know, NBR was the exception post the financial crisis. uh you know maybe not all but almost all of them did poorly because you know home prices went down a lot um and of course also home starts went down a lot >> well they were they also had a decent bit of leverage too though if I remember correctly right so like with with bellway which you've mentioned several times the nice thing here is it's basically net debtree so you know it home prices go down 10% and you're net debtree your book goes if this is 0.9x you're trading at actual book value after that right down, right? But if you have 1x turns, 1x leverage, seems pretty reasonable, but then self goes down 10%. Boom. You know, that that's really how you take the the hit >> and and you might not survive or you might have to raise capital on extremely dilutive terms. Um and uh but I I think um uh just to finish the point about London versus outside of London, if you look at home prices in the UK outside of London, uh and maybe you look at price to median income or you look at um the cost of ownership relative to median income and look at that in a long-term historical context, they're actually very reasonable outside of London. in London they're pretty expensive. Um and um so Belway for example I think has maybe uh less than 5% 2 to 4% of its total completions today are in London. Um and uh and that's also true for some of the other publicly traded home builders over there. Um, and and I I think that's really important. Um, uh, if you're going to invest in a UK home builder, I I think it really reduces the tail risk significantly. Um, the other point sort of qualitative point that I'll make about the industry is the land market. So, um, um, the land market is very different today than it was just before the global financial crisis. Um, uh, Belway was B actually kind of an exception, but most of the UK homebuilders did very poorly in in the financial crisis. Uh, maybe almost as poorly as the US ones. Uh, and a big part of that was because they were buying land in the mid 2000s up to about 2007 at prices that assumed that, you know, they were going to sell the homes at, you know, much higher prices than they they ended up doing. um land prices dropped roughly 50% in the UK or residential development land prices dropped about 50% um in the financial crisis. In nominal terms, they have recovered to about where they were at their peak in 2007, maybe even slightly below. But if you adjust for inflation, there's still, you know, probably at least 40% below the the peak in 2007. Um the reason is that um today you have a much more rational industry. You have fewer biders for any given uh piece of land. Um partly because there's been consolidation in the industry. uh partly because there are just fewer people that want to be homebuilders today than than there were in the mid-200s when the when the housing market was hot. And um um you can if if you look at all of the publicly traded home builders in the UK, uh you know, how they acted historically, you can see that they're they're run very differently today than they were before the GFC. Um, and so they've actually gotten better, much more conservatively managed. And today, I think they uh they all use very similar models for valuing land and uh have very similar hurdle rates that they use to to value land. So, um, they don't tend to get into the kinds of bidding wars that they they did, you know, in the mid 2000s. So, I I think it's a very different situation today than than it was then. And as a result, I I don't really see the same kind of downside um that um that that we did. And you know, so it's really a matter of, you know, what's the downside to home prices and what's the risk that home builders have overpaid for land? And and I think there we're in pretty good shape, especially if if we're outside of London. >> That's perfect. We've mentioned Belway a few times and I think at the start you said hey uh you're long three of them and you don't you don't have to give the specific ones or whatever you can what but let's just talk could you give me bell way and compare them to one or two others and just look when I see home builders I kind of think oh it's a home builder like they buy but if there's any differences in strategy or anything else that people should kind of be thinking about and kind of again you've mentioned Belway several times what you like specifically about Belway maybe a little bit more than others I'd just love to give people kind of a lay of the land if that makes sense. >> Yeah. So, uh um Belway is a pretty boring home builder. It's like a real cookie cutter home builder. Uh they build single family homes throughout the UK. They have a little bit of an oval waiting in the northern part of the country, which is where the business originated uh after World War II. Um, Belway has always been quite conservatively managed and and and probably been one of the best managed. It really stood out in the GFC for having um you know really good results there. Their return on equity was minus 4% in the fiscal year ending July 2009 uh which was you know this I think the second best in the industry. Um uh you know another home builder I like uh is Pimmen. Um Pimmen has a little bit different uh business model. Uh so Belway builds sort of you know middle of the road homes maybe slightly below average price point. Um Pimmen builds uh significantly below average price point homes. They have a model that's um you know very financially strong and and historically they've really uh generated some of the best uh shareholder returns in the industry. If you look at uh return on equity or return on on capital on an unleveraged basis um they um they have a little bit different model. They buy land in uh a little bit less desirable areas. they have a lot less competition uh for the land and they they save quite a lot of money that way. They build on on uh smaller plots as well and um so their the land costs are like 11 12% of revenues whereas for more typical home builders like Bellway is closer to 20%. Um and so as a result pimmen has had excellent margins and return on capital historically they also trade at I would say around one and a quarter times tangible book. Uh but it's um I would say it's it's deserved. Uh it's it's just um you know it's actually I think it's probably trades at the highest multiple of tangible book among the publicly traded home builders in the UK. but it's it's also probably the the best or second best one in the industry. So, I think that's that's also a really interesting uh business to own um at the right price. Um but there's um there's a variety of of of business models there in in the industry. Um, you know, a lot of them are more like Bellway, the sort of cookie cutter, um, geographically diversified, uh, companies. Uh, generally trading at similar multiples to Bellway. That's, you know, roughly 90% of tangible book value. But I think Belway, you know, it just has this, you know, a little bit of a qualitative edge. uh because historically it's just um uh it's just been a little bit better managed than average, especially if you look at how they did in the GFC. But I will say that um the rest of the industry has gotten much better run and much more conservatively run than they were uh before the GFC. >> Great. Let me ask on let me let me switch a little bit to management incentives and I again I listened to you pitch this idea and you mentioned the CEO at Bellway is a Bellway man. He's been a company man for probably been there 25 years if I had to guess right rose to the ranks. He's the CEO. That's great. But you know I worry with all and this is not just with UK home builders. I worry with all UK companies. I've again I've spent a lot of time looking the the governance there is I'm just going to say sleepier than the US, right? Like you'll see a lot of these companies buybacks are not in bogue. Management incentives are much less aggressive and people hear aggressive and they think oh that's good thing and I actually mean it in a bad way where they don't get paid on TR on shareholder return right they're really just kind of paid on bonuses and they kind of insider ownership across the board director ownership it's low they kind of don't care about the stock price and when I talk to a lot of the board I get the sense they don't really care. Yeah, they'd like it to be higher than not, but they just don't super care. And I I wrap that all into one overarching where we can talk belowway specific or we talk overall, but I kind of look at these and say, man, a home builder with no net debt, that's nice for the downside protection, but that is like no net debt is really inefficient. And you know, I I worry that you promote a company man who's been there for 25 years, you've grown him through through the ranks. I'm sure he's very good at building homes, but I worry like the job of a CEO ultimately capital allocation. And I kind of worry that hey, this just sits here and they pile cash on the balance sheet and they run a sleepier business model. And maybe Christian's right, but you know, the ROE instead of being 14%, it's 10% and you buy it at 90% book value. You probably do okay, but we're not talking like screaming riskadjusted alpha. Uh I I know they recently announc announced some buyback. I'll let you talk about that. But I just want to throw out the kind of hey these guys for the past couple years the the stock price has been in the doldrums. I'm not seeing lots of opportunities to like kind of pull that lever and create their own destiny. So throw it all that over to you. >> Yeah. So I I think um you know I would certainly prefer to see you know a more shareholder aligned uh compensation structure. Um but I I and but I I don't think that you know it's a sign of a management team that's you know not shareholder friendly because it's really a cultural thing right uh in the UK it it's just you know customary uh to have these you know less aggressive uh compensation plans than it is in the US. So I wouldn't you know read too much into it. That being said, I will say I think it is changing. Um, and it's not like it's terrible. I mean, Belways management does have equity uh incentives uh and they do have equity ownership, but it it's not at the level you would love to see, you know, and especially coming from a US background, you know, it it looks, you know, not great, right? Um, so I would say yeah, it would be better if if it was more shareholder aligned. Um, but you know, if if you look at, you know, what the company is actually doing and and how they've done historically for shareholders, um, I I think uh, it actually looks pretty good. Um, so Belway, um, they recently announced sort of a a new capital allocation framework. uh they they have bought back stock a couple times in the last few years. Um that's I think is um that's sort of a a sign of of a a change in how um companies in the UK um you know approach capital allocation. Um and they just announced another stock stock buyback program recently. Uh, and I think that as the, you know, as the market presumably recovers over the coming years, I think that they will do even more buybacks. I think this is probably a a change uh that's that's likely to stick uh for the long term. Um, they are they're also more focused on utilizing the balance sheet better. Uh so their net debt to total capital and if you include in the debt land payables which you'll find in in accounts payable it's you know roughly 5% today and they're going to bring that up to about 15 to 20% I believe. So the balance sheet is going to be a a bit more efficient and and that'll be accreative to shareholders and I think it's it's a good catalyst for the stock potentially as well. Um, and I I think still at at that level of leverage, I still think that the balance sheet is is strong enough to withstand like a a really severe downturn. Um, and and you want that as a shareholder, right? You don't want to suffer a large permanent loss of capital because you know there's some sort of unexpected massive downturn, a depression, war, another pandemic, who knows what major real estate pandemic might be good for them, man. You pandemic, people might be moving out of London into the into the, you know, outside. It might be great for them. >> Yeah. Um Yeah. I mean, it you never know. But um you know there there's there are always tail risks and you know having a strong balance sheet um you know is what prevents those you know unexpected situations from turning into a permanent loss of capital for shareholders due to dilutive equity offerings or bankruptcy uh you know at 15 20% net debt to total capital which I think is pretty similar to what Bellway had right before the GFC um is um you know should you know should still be fine. It's interesting about the home building business model that in a downturn you actually generate a lot of positive cash flow because you're not buying much land and you're not not building as much. So you are quote unquote inventory which is land that and work in process and the the roads, sewers, things like that, you know, that and um that frees up cash and so uh uh and and that also helps. So I think that Belway will still be fine. I'll still be, you know, it's still going to be a sleep well at night investment even with that level of leverage. Um and and the last thing about their their new capital allocation framework I'll mention is that they're going to be more focused on just asset turnover. Um so I think that um you know first of all it is actually changing uh in a tangible way now at Belway and and I think it's you know it may have a little bit to do with their new CFO. I don't know. It It's probably also just a a you know a sort of general trend um among UK publicly traded companies a little bit. Not I wouldn't want to overstate that. And maybe also just um the fact that they're sensitive to um you know shareholder value and not least given the fact that we we're in a downturn, right? And and shareholders want to see a return on their investment. Um, so you know, I I commend them for doing that. And again, I the fact that the the shareholder incentives are not like they are for a lot of US companies, it's it's it's a cultural thing and I I would not read too much into it. >> I I I think you're you hit the nail on the head. It is a cultural thing, but as I keep like look, we said at the start, right? I said, "Hey, more American investors are interested in the UK home builders than UK investors." And guess what happens when you start getting a roster full of American investors? Yeah, culturally you might not be able to, but the American investors vote. And as you get more American investors, they're going to start demanding a little bit more. And you know, I've had friends who do a lot more in the UK than I do. And they tell me, "Look, culturally, it's slow. It takes time." But you are starting to see it right at Bellway. 150 million if I remember correctly. uh share repurchase plan that will get executed over the next year. That's 5% of market cap. It's not huge, but it's also it's also not nothing. And uh I think you're going to keep seeing the push for that. And you are seeing across the board at the UK more share buybacks and it starts slow, but it keeps building on each other. So I I I do think there's a little bit there. I I kind of rambled on that incentive. Do you anything else you want to say on the incentives or anything? >> No, nothing to add on that. Let me just one last question and maybe we can touch on some other stuff, but you know, I do want to ask I I've alluded to several times. There's a ton of cheap stuff over in the UK, right? And I think somebody who listens to this podcast might say, "Okay, Andrew and Christian both agreed that there's a ton of cheap stuff in the UK. Fiscal picture might be a little bleak, whatever. Why not go find stuff in the UK that has a lot of international exposure from the UK and kind of gets thrown out with that uh bathwire. I'm not going to no names are like jumping off the top of my head, but there are plenty of stocks in the UK that have some UK present but that have a lot of international presence, you know, in the same way that the US has Apple, which yeah, it has a heck of a US presence, but it's got a heck of a lot of worldwide presence, too, you know. So, I think people might say, "Hey, if you're kind of looking at this as a the UK is cheap play and we're comping Apple Store, like there's other stuff that trades below book value in the UK that's got a lot of international exposure. Why Why do you want like that that uh home builder risk versus just kind of going elsewhere?" I I realize it's a hard question to answer, but I'd love to put that to you. >> Yeah, I think in in principle, you're absolutely right. Um I don't really um have anything along those lines. Yeah, I I tend to focus a little bit more on the small caps. Uh I think small caps in particular in the UK have been really attractive uh really cheap uh for a while and still are. So that's that's where I found the most value. But I think in principle it's it's totally logical and I I think there there probably are some opportunities like that. >> Yeah. No, I I've just been fascinated by the UK market. And you know what I love about the UK market more than anything. I love that the companies have to file the form fours every day and tell you if they're buying back shares. Like every day I wake up and I'm like, "Oh, these six companies, another day, another buyback, you know?" >> Yeah. Yeah. So I I get those every single morning. Yeah. >> We we hit on the UK. I'd love to just we've got about five minutes left. I'd love to just uh bounce around or so we hit on the UK home builders. What else in the UK are you interested in right now? >> You know, um the other things I own in the UK are are fairly idiosyncratic. Um I do own some distributors in the UK, but they're they're sort of in in different businesses. Um uh a I think you know a lot of things in the UK uh that have some sort of housing exposure are maybe particularly cheap. Um we own a uh distributor of mostly wood panels. Uh it's called James Leam. Uh it's like a really boring illquid micro cap. um uh super high quality uh not quite as cheap as as Belway uh but you know super safe uh high quality probably around 10ish right around 10 times earnings. Um, so I I think if I was going to look for cheap stocks in the UK, I would um I would be looking for things that are sort of housing related in some way or that are, you know, where the demand is is impacted by the really low consumer confidence that we have in the UK right now. I mean, the economy is weak, but consumer confidence is really low in the UK. and and obviously that's affected stocks like James Leam, you know, because uh wood panels uh are are seen as, you know, housing related as as they are. Uh um it's more for the repair, maintenance, and improvement market than the than the new build market in this case. Um but, you know, that's that's where I would look. Um but but in the UK uh I think the themes uh you know there there's really just home home builders are cheap anything that's you know exposed to consumer confidence small caps I think there are a lot of really good ones but outside of that for me it's it's pretty idiosyncratic makes total sense no just uh I know I've had multiple friends Travis Perkins and a few other distributors they they've they've talked about a lot and as you said, anything in the UK, Wix, the kind of uh do-it-yourself home improvement. I've looked at that a few times and that looks very cheap, but you know, it's a retailer and it's got the home improvement play, but yeah, anything that touches the consumer, it's just crazy. And I I just these foreign fours, you look at them, you're like, "Hey, man, if the if these stocks don't go up, these guys aren't even like pushing it to the max on the buybacks." But if these if these stocks don't go up, you're going to get 10% of the stock bought back every year plus dividends and more free cash flow on top. Unless the whole thing goes into a depression, it's it's kind of hard to see how you get. And look, also the UK government I mean, you probably know more about it than me, but it seems like they they realize they're in a tough spot because they are starting to talk about, hey, the stamp taxes and everything, we need to repeal those. We need to be a better place for international capital, for domestic capital, that sort of stuff. So it seems like you've got a lot the the valuation's there. You've got a lot of the tailwinds, but Yeah. >> Yeah. And and you you mentioned the the new UK labor government, which has been there for about a year and a half now. Uh, I would say even though they're viewed as being, you know, a little bit business unfriendly for the homebuilders, I would say they've probably been a net positive because they have improved the um the planning uh the the the process for getting planning permission for for housing developments. Uh and and that actually is a little bit of a tailwind for the homebuilders. Even the business unfriendly parties I I think are increasingly starting to realize I mean you've got them here in America the the housing situation is at a breaking point and you see if they don't get a handle on it and they don't start approving like the one way to solve housing it's very simple build more housing I if they don't get a handle on that uh they're going to get voted out so even the business unfriendly ones I think are getting that last question there that is always an interesting one right like I think in the 2000 the late 2010s the home builders in the and I'm thinking domestic, not international. The home builders did well in part because the the housing uh building permits were so restrictive that you know prices were really ran and then you really saw it after co right but they they benefited from the restriction and it kind of reminds me of oil right like all these oil exacts want to drill baby drill and they want permits everywhere. It's kind of like be careful what you wish for. I'd love to end with that question to you on the UK. Like if you get more supportive policies that allow for more home building, is that a bull case or a bare case for these guys? >> I I think it is um net a net positive for them because they will be able to uh really turn over their their land banks faster and their volumes will go up. Uh I think it it'll it be a plus for the intrinsic value and maybe even more so for the stock prices. You're right though that you know the constrained supply in the UK which is mostly because of the a very difficult uh environment for getting planning permission for new developments that's that's a real underpin uh you know for their asset values uh and so you know bels you know bel trades at 89% of tangible book value and that's you know that's you know inherently valuable land uh and work in progress. I think you know just about you know you know almost you know every plot they own you know someday they or somebody probably themselves will build something on there and make money on it's um land is is just inherently valuable especially if it's bought reasonably intelligently. So on the one hand you know uh the constrained land supply it it really underpins the asset value. Uh uh on the other hand I I I I do think it would be a net [snorts] positive for them especially for the stock price if the volumes really started going up and and and I think the volumes would start going up. Uh although you you know that really also depends on on demand. Um and and I like I said before, I think it's just a matter of time before demand normalizes or the government uh comes out with a um demand stimulus program. This is something we didn't touch on. Think it's potential positive catalyst for the sector. Um we we have not had a demand stimulus program for new build housing in the UK for a couple of years now. That's actually quite unusual and and there's some speculation that the government would uh would create one at some point here in the next uh year or two perhaps. >> Perfect. But Christian, I think we did a nice job walking through I mean look, home building, it's a UK home building, it's a big sector, but it's not a crazy complex sector. I think we did a nice job walking through risk, rewards, opportunity. Obviously, Bellway was a focus, but I I always want to turn over to you. anything you think we should we just skipped over or anything you think we kind of glossed over we should hit harder. >> Um I I think we covered um the important stuff. I would just say sort of in summary that you know I I think the upside is is quite meaningful. You know I think you know Bellway I could easily see it trading at one and a half times book value and that book value is increasing even now with depressed demand. Uh so going from you know 89% of of book to you know maybe one and a half times book over the next couple years or the next few years. Uh with the compounding on top of that I think the upside is actually pretty nice and and and but and also I I would really stress this. I think um for a long-term investor I think the downside is is quite small. Um the you know this is a sleep well at night investment for me and so on a risk adjusted basis I I think it's it's really one of my favorite investments. >> Fantastic. Well look that's why I wanted to have you on. I love to have smart people come on to talk about their favorite investments. So Christian Olsson from Olsson Value Funds. This has been great. We'll have to have you on for a second podcast in the near future but appreciate you coming on to walk us through home building across the pond and we'll talk that soon. >> Thanks for having me. A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.
UK Homebuilders with Christian Olesen from Olesen Value Fund
Summary
Transcript
You're about to listen to yet another value podcast with your host me, Andrew Walker. Today's podcast is a really interesting one. I have Christian Olsson from Olsson Value Funds on. He is going to talk about the opportunity in UK homebuilders in general and Bellway in particular. I think you from a just quantitative value perspective. I think you're going to be really interested in this one. Look, I mean to cut to the bottom line, UK Belway is trading below tangible book value and they do like kind of mid- teens roe through the cycle. Those two statements do not belong together. So, you know, please consult financial advisor, not financial advice. We're going across the pond, so that carries all sorts of risk and due diligence, all that. But I think it's a really interesting podcast and we're going to talk home builders in particular. We're also going to talk about the UK market more broadly. Think you'll learn a lot. We're going to get there in one second, but first, a word from our sponsors. This podcast is sponsored by AlphaSense. One of the hardest parts of investing is seeing what's shifting before everyone else. For decades, only the largest hedge funds could afford extensive channel research programs to spot inflection points before earnings and stay ahead of consensus. Meanwhile, smaller funds had been forced to cobble together ad hoc channel intelligence or rely on stale reports from sellside shops. But channel checks are no longer a luxury. They're becoming table stakes for the industry. The challenge has always been scale, speed, and consistency. That's where AlphaSense comes in. AlphaSense is redefining channel research. Instead of static point in time research, AlphaSense channel checks delivers a continuously refreshed view of demand, pricing, and competitive dynamics powered by interviews with real operators, suppliers, distributors, and channel partners across the value chain. Thousands of consistent channel conversations every month deliver, comparable signals, helping investors spot inflection points weeks before they show up in earnings or consensus estimate. The best part is that these proprietary channel checks integrate directly into AlphaSense's research platform, which is trusted by 75% of the world's top hedge funds with access to over 500 million premium sources. From company filings and broker research to news, trade journals, and more than 240,000 expert call transcripts, that context turns raw signal into conviction. The first to see wins, the rest follow. Check it out for yourself at alphasense.comyavp. That's alpha-sense.comyavvp. All right. Hello and welcome to yet another value podcast. I'm your host Andrew Walker and with me today, I'm happy to have on for the first time Christian Olsson from Olsen Value Funds. Christian, how's it going? >> It's going great, thanks. How you doing? >> Doing great. Uh really excited to talk about a a idea I followed off and on for the past couple years. Uh but before we get there, quick disclaimer, remind everyone, nothing on this podcast is investing advice. always true, but maybe particularly true today because as you'll hear in a second, we're talking about an international market which carries, you know, kind of hiding risk for any of my domestic listeners. And, you know, it's a UK market. So, I might say it's a developed market. I kind of think the UK is an emerging market at this point, but neither here nor there. Anyway, Christian, the reason I reached out to you, you wrote up in, I believe it was your Q3 letter, you had a write up on just the UK home builders in general. And this is a space that I've been interested in cuz again as I said the UK is I think it might be the cheapest market and maybe the most inefficient market of kind of the larger Western European markets on the planet. So I'm just interested overall and I'm interested specifically in the UK home builders. I am rambling. I'll toss it over to you. We're going to discuss the UK home building market. I'd love to just start with your overall thesis and then we can dive in from there. >> Yeah. Um yeah, thanks for having me on, Andrew. Um um I think you're you're totally right. The UK market is definitely one of the cheapest stock markets out there. I actually have more than half of Value Fund's portfolio in UK stocks at this point and um we have a a big industry exposure to the homebuilders in the UK. Uh we currently have three positions. Um my favorite in this sector is Bellway. Um, and um, yeah, I I think that the UK home builders are just um, I I think it's a great setup. I think there's, you know, they're quantitatively cheap. Uh, I think there's lots of upside. Um, most of these businesses are really good long-term compounders of value, even on a per share basis. Um, and I think that for a long-term investor, um, there's very little downside in in some of the UK homebuilders, especially Bellway. Um, so I think, you know, on a risk return basis, um, uh, I I think it's really especially attractive. And so, you know, we have a big exposure to the to the sector and and we can really do that because like I said, I think there's very little downsides uh if you're a long-term investor. That's a great way to frame it. I I I want to dive into a few things there, but let me just start Well, let me start with my favorite question because I I do think it helps frame every conversation. The market is a really competitive place. What are you seeing in the UK homebuilders in particular that kind of make this a risk adjusted alpha opportunity? >> Yeah, so I think really um this opportunity it's you know why does it exist um and you know what's the bare case uh and what do I see in it um that others maybe don't but you know I think it's actually a pretty simple setup. I think it's it's really a cyclical recovery story. I don't think there's really much of like an intelligent bare case uh for the UK homebuilders, especially the higher quality ones. If you're a long-term investor, um I think um you know the the setup is is is pretty you know sort of stereotypical for a cyclical. Um you know we have an industry where demand is volatile uh and supply adjusts much more slowly than demand. Um and unlike from the US where we sit uh when interest rates went up around 2022 the demand for new build housing in the UK dropped uh very significantly. So uh I think Belway's completions are down maybe round about 35% or something like that compared to before the drop in interest rates. I'm sorry before the increase in interest rates. Um whereas you know in the US we've we've seen a different story. We've seen a much stronger markets. Um so um you know that's really why the stocks in the industry sold off. uh back around 2022 and and why they remain cheap. Um and I I think you know maybe you can you can add to that that um um you know investor sentiment in the UK has been quite pessimistic for a long time and um you know homebuilder stocks you know they they have not really recovered to anywhere near their sort of historical average levels in terms of the multiples they trade at. So I think it's really pretty simple you know uh pretty big drop in demand um um pretty fixed supply um and as a result the market has just sold off. I I have some questions that some questions of push backs I'm excited to get to you but maybe I think the best place to start might be let's just frame it. You mentioned Bellway a few times and I don't think the stats look dramatically different from one to the other. So you can give it overall are Bellway specific, but maybe we could just frame the I I think what attracts you probably rightly is, hey, you have this uh cyclical home builder that's trading on every quant metric very cheaply. Maybe we can just frame the quantitative cheapness of it just to kind of set the stage. And I, you know, spoiler alert, I listened to a presentation you did on it and you kind of talked about the value you saw, you know, if it kind of mean reverts over the next, maybe we can also use that just to show the upside that people are playing for as well. >> Yeah. So, Beltway as of today trace at 89% of tangible book value. Um, historically, depending on how far back you go, it's been about like one and a quarter 1.3 times tangible book. And actually I think that's too low. I think the intrinsic value is at least one and a half times tangible book and it has traded you know above one and a half times tangible book in the past. Um and um and you know they're still making money. Uh the value is compounding uh and so the value is growing while you hold it and in addition you'll I think you'll see a multiple rerating over time. Um, and this is uh this holds true for pretty much all of the UK homebuilders. There are some differences there. Um, I would also just add that, um, Bellway and certain of the other publicly traded home builders in the UK, and I think that's eight or nine of them left at this point. Um, many of them are really excellent long-term compounders of per share value. Um, most of them have a very good balance sheets. Uh, Belway has almost zero net debts uh, currently, although that will probably go up a little bit because they're starting to buy back shares and and be a little bit more proactive with their capital allocation. Um, so, um, I I think, you know, it's the type of business where you don't really have a big risk of a permanent loss of capital even though it's in a very cyclical business. Um, so you know, I think it's it'll just compound over the cycle and it's really just a matter of being patient and waiting for for the multiples to rerate. That's a that was a perfect overview. So let let me try to give a few push backs. I guess my my main push back and I'm not even saying these are push backs, you know, this is just me is stress testing the the case. It is a UK home builder, right? And it is tied to home building. Ultimately, the value of the homes at some point is tied to the economics of the UK. And the UK to my untrained macro eye looks like a kind of disaster. And you know, I everybody says, "Hey, you know, the best way to get rich in America is to buy a house with an 80% mortgage over the long term." That's generally true, but you know, I I always joke, you think about the people who bought houses in Detroit in the 1980s and the city kind of went to heck as all the auto manufacturers went way downhill. I don't think they did that well on their home purchases and like I guess my first push back to you is given the fiscal situation in the UK, you know, I I think you've seen a lot of wealthy people fleeing. I is this is buying a UK home builder like 0.89 times price to book that relies on the book being reliable. If the book is made up of in my case Detroit 1980s land like that that book's going to get cut. So I guess my first push back would be hey are we looking at something where the macro headwinds kind of overwhelm the the general cyclicality and kind of historical quantitative metrics you've talked about? >> I don't think so. I mean, I think that fundamentally the demand for housing in the UK in the long run is quite solid. I think it's underpinned by, you know, population growth and probably a little bit of growth in GDP per capita over time. Uh, you're right that currently the UK economy is pretty weak. It's, you know, pretty close to recession. is you know roughly zero growth and consumer confidence is is quite low currently actually. Um but I think um you know a few um I mean I I I would not compare the UK to Detroit um you know Detroit saw a massive decline in its population uh because of the decline in the auto industry. No, I you know I'm just speculating. I I don't disagree, but we have seen like a lot of the finance industry left post Brexit and it's not lost on me like one of the ways cities and states go downhill is you keep shooting yourself in the foot and from an outsider view seems to me like you know the UK has shot itself in the foot for the past 10 years basically. Yeah, >> I I mean I think that's um I I I think that overstates it actually. I think you're right that economic growth has been pretty weak in the UK. Uh but I wouldn't call it a disaster by any means. Um I I just don't see that in the numbers. Um you know it's an economy that I think will continue to grow albeit perhaps slowly. Um and um and I think you know if you look at the decline in the demand for new build housing that we've seen uh in the last three years or so uh it's um you know it you know in the long run I I think demand almost has to rebound. Uh you know we we've seen a huge decline in demand. Um and that's really because you know when people see uh I would say in large part it's because when people see this big increase in interest rates where whereas you know in the UK you might have bought a home at a you know one and a half% interest rate or something like that I've gotten a a mortgage at a one and a half% interest rate four years ago. Now it's maybe four and a quarter percent. uh at one point it was it was higher than that you know it's quite a sticker shock um but over time I think uh like I said the demand for for housing I think it's pretty price inelastic in the long run because housing is a basic need with no substitutes um and I I think people will will pay what what they have to pay uh for housing. Um so uh and and we I think we've seen that historically you know uh demand for housing especially new build housing is just really cyclical. you know, you can see that time after time after time if you go back decades uh and look at the historical data. Um, and I think this is just another example of that. you know, just on that cyclical demand and everything he said, I don't know if there's a bull case or a bare case, but as I said, I I have done some work on the UK home builders and it's funny if you reach out to the RR teams, this is just my anecdote, so I'm not suggesting this is 100% verified or true code, but in general, when I've talked to them, they've kind of suggested to me like, hey, the domestic, and I mean domestic as in the UK domestic interest in our stocks is nothing. most of the outreach is coming from American you know generally American but kind of international people who are interested in in us for all the reasons that you you are laying out right like we are quantitatively cheap we're at the bottom of the cycle all that sort of stuff I don't know if that's a bull case or a bare case but I find it interesting when they're like hey domestically people are just you know they vomit in their mouth a little bit when they bring us up but internationally the value investors are coming for us and we're you know the history's been popular with American investors all these. But I I find that interesting. Not saying there's signal to the noise there, but I just find that interesting. I'll toss it over to you. >> I I I think you're definitely on to something. Um, you know, I think it speaks to how out of favor UK stocks are and UK homebuilders are in particular. Um, and just also just how little value is left in especially the US stock markets and and maybe also in certain other places around the world and just how cheap the UK stock market is. So let me ask this before we go through many of the different ones. How much of this is just a quantitative bet for you? Right. This is I'm just going to use bellwe again trading at 0.9 times book and historically roe are in the low to probably closer to the mid- teens like through the cycle. So when you something that does mid- teens ROE should probably trade closer to two times than 1.5 times book and you're saying hey I'm getting it for 0.9x and this is a great quantitative bet and by the way low low debt all that sort of stuff versus how much is this is a qualitative bet to you where you kind of more look at the overall UK landscape and say hey you know it is short of housing there there all the housing trends that have kind of come to play in the US over the 10 past 10 years the UK kind of ex experiencing the same things and you look at you know each government's coming in and saying hey we're going to we're going to build new housing so how would you weigh just like the quantitative versus qualitative there >> so I think you know it is also very qualitative but but in a different way than what you suggested and and I can talk about that that thesis that you you mentioned with the sort of chronic under supply of housing in the UK which is absolutely true I just don't think that's really going to change very touch. Um but it's it's qualitative uh especially for a company like Belway uh in that if you study its history um going back a few decades actually and and maybe especially how the company performed uh during the great financial crisis. I think you really see a a a company and a culture that's um um very conservative and and has simply been able to compound per share value um very nicely over the very long run. I mean this this is a a good long-term compounder. It's not like say NBR which is a US home builder that has you know a particularly capital light business model uh and which has done phenomenally well also in part because of its massive stock buybacks. It's not like that. Okay. But um I think it's it's a really solid uh really solid business. I think also it you have to really sort of look under the hood a little bit and and look at you know what are the risks when you invest in a home builder and I I think I'll I'll touch on two two sort of qualitative things as well there. One is about the the land market and the other one is home prices in the UK. So um let's take home prices first. Um and and I think this is actually quite important if you're going to invest in UK home builders in my opinion. Uh there is uh quite a divide between London and the UK excluding London. Um home prices in London went up a lot after the financial crisis up until around Brexit in 2016 and then they've remained pretty high but you know relatively steady since then. and and London is just really really expensive. Um I would worry if I was invested in in a home builder that had exposure to London, I would be worried about, you know, potential drop in prices in London. Uh I I wouldn't say I'm forecasting that, but I think that's definitely a risk. Um, you know, if you think about the home building business model, you know, it's really like a a manufacturing business where you have very substantial inventory gains or losses because you hold the inventory for so long, especially the land, right? About, you know, the inventory quote unquote is really land and work in process. About twothirds of it land, one-third work in process. Um, and so if you buy land, um, uh, under the assumption that home prices are going to be, you know, what they were when you bought the land, for example, what you thought they were going to be, but home prices drop, say, 20%. Um, you're going to have massive write downs and you're going to lose a lot of money. >> This is the Detroit worry I had, right? You've got you've got the land you're you're Detroit in the 80s and then by the 2002s it's like well hey that land is worth 30% less and inflation's gone up 20%. So woo that's a really big write down. Yeah, it's a it's really the key risk uh if you invest in home builders and and I think you know maybe especially if if you look at how most of the US home builders did, I think probably every single one of the publicly traded US home builders, you know, NBR was the exception post the financial crisis. uh you know maybe not all but almost all of them did poorly because you know home prices went down a lot um and of course also home starts went down a lot >> well they were they also had a decent bit of leverage too though if I remember correctly right so like with with bellway which you've mentioned several times the nice thing here is it's basically net debtree so you know it home prices go down 10% and you're net debtree your book goes if this is 0.9x you're trading at actual book value after that right down, right? But if you have 1x turns, 1x leverage, seems pretty reasonable, but then self goes down 10%. Boom. You know, that that's really how you take the the hit >> and and you might not survive or you might have to raise capital on extremely dilutive terms. Um and uh but I I think um uh just to finish the point about London versus outside of London, if you look at home prices in the UK outside of London, uh and maybe you look at price to median income or you look at um the cost of ownership relative to median income and look at that in a long-term historical context, they're actually very reasonable outside of London. in London they're pretty expensive. Um and um so Belway for example I think has maybe uh less than 5% 2 to 4% of its total completions today are in London. Um and uh and that's also true for some of the other publicly traded home builders over there. Um, and and I I think that's really important. Um, uh, if you're going to invest in a UK home builder, I I think it really reduces the tail risk significantly. Um, the other point sort of qualitative point that I'll make about the industry is the land market. So, um, um, the land market is very different today than it was just before the global financial crisis. Um, uh, Belway was B actually kind of an exception, but most of the UK homebuilders did very poorly in in the financial crisis. Uh, maybe almost as poorly as the US ones. Uh, and a big part of that was because they were buying land in the mid 2000s up to about 2007 at prices that assumed that, you know, they were going to sell the homes at, you know, much higher prices than they they ended up doing. um land prices dropped roughly 50% in the UK or residential development land prices dropped about 50% um in the financial crisis. In nominal terms, they have recovered to about where they were at their peak in 2007, maybe even slightly below. But if you adjust for inflation, there's still, you know, probably at least 40% below the the peak in 2007. Um the reason is that um today you have a much more rational industry. You have fewer biders for any given uh piece of land. Um partly because there's been consolidation in the industry. uh partly because there are just fewer people that want to be homebuilders today than than there were in the mid-200s when the when the housing market was hot. And um um you can if if you look at all of the publicly traded home builders in the UK, uh you know, how they acted historically, you can see that they're they're run very differently today than they were before the GFC. Um, and so they've actually gotten better, much more conservatively managed. And today, I think they uh they all use very similar models for valuing land and uh have very similar hurdle rates that they use to to value land. So, um, they don't tend to get into the kinds of bidding wars that they they did, you know, in the mid 2000s. So, I I think it's a very different situation today than than it was then. And as a result, I I don't really see the same kind of downside um that um that that we did. And you know, so it's really a matter of, you know, what's the downside to home prices and what's the risk that home builders have overpaid for land? And and I think there we're in pretty good shape, especially if if we're outside of London. >> That's perfect. We've mentioned Belway a few times and I think at the start you said hey uh you're long three of them and you don't you don't have to give the specific ones or whatever you can what but let's just talk could you give me bell way and compare them to one or two others and just look when I see home builders I kind of think oh it's a home builder like they buy but if there's any differences in strategy or anything else that people should kind of be thinking about and kind of again you've mentioned Belway several times what you like specifically about Belway maybe a little bit more than others I'd just love to give people kind of a lay of the land if that makes sense. >> Yeah. So, uh um Belway is a pretty boring home builder. It's like a real cookie cutter home builder. Uh they build single family homes throughout the UK. They have a little bit of an oval waiting in the northern part of the country, which is where the business originated uh after World War II. Um, Belway has always been quite conservatively managed and and and probably been one of the best managed. It really stood out in the GFC for having um you know really good results there. Their return on equity was minus 4% in the fiscal year ending July 2009 uh which was you know this I think the second best in the industry. Um uh you know another home builder I like uh is Pimmen. Um Pimmen has a little bit different uh business model. Uh so Belway builds sort of you know middle of the road homes maybe slightly below average price point. Um Pimmen builds uh significantly below average price point homes. They have a model that's um you know very financially strong and and historically they've really uh generated some of the best uh shareholder returns in the industry. If you look at uh return on equity or return on on capital on an unleveraged basis um they um they have a little bit different model. They buy land in uh a little bit less desirable areas. they have a lot less competition uh for the land and they they save quite a lot of money that way. They build on on uh smaller plots as well and um so their the land costs are like 11 12% of revenues whereas for more typical home builders like Bellway is closer to 20%. Um and so as a result pimmen has had excellent margins and return on capital historically they also trade at I would say around one and a quarter times tangible book. Uh but it's um I would say it's it's deserved. Uh it's it's just um you know it's actually I think it's probably trades at the highest multiple of tangible book among the publicly traded home builders in the UK. but it's it's also probably the the best or second best one in the industry. So, I think that's that's also a really interesting uh business to own um at the right price. Um but there's um there's a variety of of of business models there in in the industry. Um, you know, a lot of them are more like Bellway, the sort of cookie cutter, um, geographically diversified, uh, companies. Uh, generally trading at similar multiples to Bellway. That's, you know, roughly 90% of tangible book value. But I think Belway, you know, it just has this, you know, a little bit of a qualitative edge. uh because historically it's just um uh it's just been a little bit better managed than average, especially if you look at how they did in the GFC. But I will say that um the rest of the industry has gotten much better run and much more conservatively run than they were uh before the GFC. >> Great. Let me ask on let me let me switch a little bit to management incentives and I again I listened to you pitch this idea and you mentioned the CEO at Bellway is a Bellway man. He's been a company man for probably been there 25 years if I had to guess right rose to the ranks. He's the CEO. That's great. But you know I worry with all and this is not just with UK home builders. I worry with all UK companies. I've again I've spent a lot of time looking the the governance there is I'm just going to say sleepier than the US, right? Like you'll see a lot of these companies buybacks are not in bogue. Management incentives are much less aggressive and people hear aggressive and they think oh that's good thing and I actually mean it in a bad way where they don't get paid on TR on shareholder return right they're really just kind of paid on bonuses and they kind of insider ownership across the board director ownership it's low they kind of don't care about the stock price and when I talk to a lot of the board I get the sense they don't really care. Yeah, they'd like it to be higher than not, but they just don't super care. And I I wrap that all into one overarching where we can talk belowway specific or we talk overall, but I kind of look at these and say, man, a home builder with no net debt, that's nice for the downside protection, but that is like no net debt is really inefficient. And you know, I I worry that you promote a company man who's been there for 25 years, you've grown him through through the ranks. I'm sure he's very good at building homes, but I worry like the job of a CEO ultimately capital allocation. And I kind of worry that hey, this just sits here and they pile cash on the balance sheet and they run a sleepier business model. And maybe Christian's right, but you know, the ROE instead of being 14%, it's 10% and you buy it at 90% book value. You probably do okay, but we're not talking like screaming riskadjusted alpha. Uh I I know they recently announc announced some buyback. I'll let you talk about that. But I just want to throw out the kind of hey these guys for the past couple years the the stock price has been in the doldrums. I'm not seeing lots of opportunities to like kind of pull that lever and create their own destiny. So throw it all that over to you. >> Yeah. So I I think um you know I would certainly prefer to see you know a more shareholder aligned uh compensation structure. Um but I I and but I I don't think that you know it's a sign of a management team that's you know not shareholder friendly because it's really a cultural thing right uh in the UK it it's just you know customary uh to have these you know less aggressive uh compensation plans than it is in the US. So I wouldn't you know read too much into it. That being said, I will say I think it is changing. Um, and it's not like it's terrible. I mean, Belways management does have equity uh incentives uh and they do have equity ownership, but it it's not at the level you would love to see, you know, and especially coming from a US background, you know, it it looks, you know, not great, right? Um, so I would say yeah, it would be better if if it was more shareholder aligned. Um, but you know, if if you look at, you know, what the company is actually doing and and how they've done historically for shareholders, um, I I think uh, it actually looks pretty good. Um, so Belway, um, they recently announced sort of a a new capital allocation framework. uh they they have bought back stock a couple times in the last few years. Um that's I think is um that's sort of a a sign of of a a change in how um companies in the UK um you know approach capital allocation. Um and they just announced another stock stock buyback program recently. Uh, and I think that as the, you know, as the market presumably recovers over the coming years, I think that they will do even more buybacks. I think this is probably a a change uh that's that's likely to stick uh for the long term. Um, they are they're also more focused on utilizing the balance sheet better. Uh so their net debt to total capital and if you include in the debt land payables which you'll find in in accounts payable it's you know roughly 5% today and they're going to bring that up to about 15 to 20% I believe. So the balance sheet is going to be a a bit more efficient and and that'll be accreative to shareholders and I think it's it's a good catalyst for the stock potentially as well. Um, and I I think still at at that level of leverage, I still think that the balance sheet is is strong enough to withstand like a a really severe downturn. Um, and and you want that as a shareholder, right? You don't want to suffer a large permanent loss of capital because you know there's some sort of unexpected massive downturn, a depression, war, another pandemic, who knows what major real estate pandemic might be good for them, man. You pandemic, people might be moving out of London into the into the, you know, outside. It might be great for them. >> Yeah. Um Yeah. I mean, it you never know. But um you know there there's there are always tail risks and you know having a strong balance sheet um you know is what prevents those you know unexpected situations from turning into a permanent loss of capital for shareholders due to dilutive equity offerings or bankruptcy uh you know at 15 20% net debt to total capital which I think is pretty similar to what Bellway had right before the GFC um is um you know should you know should still be fine. It's interesting about the home building business model that in a downturn you actually generate a lot of positive cash flow because you're not buying much land and you're not not building as much. So you are quote unquote inventory which is land that and work in process and the the roads, sewers, things like that, you know, that and um that frees up cash and so uh uh and and that also helps. So I think that Belway will still be fine. I'll still be, you know, it's still going to be a sleep well at night investment even with that level of leverage. Um and and the last thing about their their new capital allocation framework I'll mention is that they're going to be more focused on just asset turnover. Um so I think that um you know first of all it is actually changing uh in a tangible way now at Belway and and I think it's you know it may have a little bit to do with their new CFO. I don't know. It It's probably also just a a you know a sort of general trend um among UK publicly traded companies a little bit. Not I wouldn't want to overstate that. And maybe also just um the fact that they're sensitive to um you know shareholder value and not least given the fact that we we're in a downturn, right? And and shareholders want to see a return on their investment. Um, so you know, I I commend them for doing that. And again, I the fact that the the shareholder incentives are not like they are for a lot of US companies, it's it's it's a cultural thing and I I would not read too much into it. >> I I I think you're you hit the nail on the head. It is a cultural thing, but as I keep like look, we said at the start, right? I said, "Hey, more American investors are interested in the UK home builders than UK investors." And guess what happens when you start getting a roster full of American investors? Yeah, culturally you might not be able to, but the American investors vote. And as you get more American investors, they're going to start demanding a little bit more. And you know, I've had friends who do a lot more in the UK than I do. And they tell me, "Look, culturally, it's slow. It takes time." But you are starting to see it right at Bellway. 150 million if I remember correctly. uh share repurchase plan that will get executed over the next year. That's 5% of market cap. It's not huge, but it's also it's also not nothing. And uh I think you're going to keep seeing the push for that. And you are seeing across the board at the UK more share buybacks and it starts slow, but it keeps building on each other. So I I I do think there's a little bit there. I I kind of rambled on that incentive. Do you anything else you want to say on the incentives or anything? >> No, nothing to add on that. Let me just one last question and maybe we can touch on some other stuff, but you know, I do want to ask I I've alluded to several times. There's a ton of cheap stuff over in the UK, right? And I think somebody who listens to this podcast might say, "Okay, Andrew and Christian both agreed that there's a ton of cheap stuff in the UK. Fiscal picture might be a little bleak, whatever. Why not go find stuff in the UK that has a lot of international exposure from the UK and kind of gets thrown out with that uh bathwire. I'm not going to no names are like jumping off the top of my head, but there are plenty of stocks in the UK that have some UK present but that have a lot of international presence, you know, in the same way that the US has Apple, which yeah, it has a heck of a US presence, but it's got a heck of a lot of worldwide presence, too, you know. So, I think people might say, "Hey, if you're kind of looking at this as a the UK is cheap play and we're comping Apple Store, like there's other stuff that trades below book value in the UK that's got a lot of international exposure. Why Why do you want like that that uh home builder risk versus just kind of going elsewhere?" I I realize it's a hard question to answer, but I'd love to put that to you. >> Yeah, I think in in principle, you're absolutely right. Um I don't really um have anything along those lines. Yeah, I I tend to focus a little bit more on the small caps. Uh I think small caps in particular in the UK have been really attractive uh really cheap uh for a while and still are. So that's that's where I found the most value. But I think in principle it's it's totally logical and I I think there there probably are some opportunities like that. >> Yeah. No, I I've just been fascinated by the UK market. And you know what I love about the UK market more than anything. I love that the companies have to file the form fours every day and tell you if they're buying back shares. Like every day I wake up and I'm like, "Oh, these six companies, another day, another buyback, you know?" >> Yeah. Yeah. So I I get those every single morning. Yeah. >> We we hit on the UK. I'd love to just we've got about five minutes left. I'd love to just uh bounce around or so we hit on the UK home builders. What else in the UK are you interested in right now? >> You know, um the other things I own in the UK are are fairly idiosyncratic. Um I do own some distributors in the UK, but they're they're sort of in in different businesses. Um uh a I think you know a lot of things in the UK uh that have some sort of housing exposure are maybe particularly cheap. Um we own a uh distributor of mostly wood panels. Uh it's called James Leam. Uh it's like a really boring illquid micro cap. um uh super high quality uh not quite as cheap as as Belway uh but you know super safe uh high quality probably around 10ish right around 10 times earnings. Um, so I I think if I was going to look for cheap stocks in the UK, I would um I would be looking for things that are sort of housing related in some way or that are, you know, where the demand is is impacted by the really low consumer confidence that we have in the UK right now. I mean, the economy is weak, but consumer confidence is really low in the UK. and and obviously that's affected stocks like James Leam, you know, because uh wood panels uh are are seen as, you know, housing related as as they are. Uh um it's more for the repair, maintenance, and improvement market than the than the new build market in this case. Um but, you know, that's that's where I would look. Um but but in the UK uh I think the themes uh you know there there's really just home home builders are cheap anything that's you know exposed to consumer confidence small caps I think there are a lot of really good ones but outside of that for me it's it's pretty idiosyncratic makes total sense no just uh I know I've had multiple friends Travis Perkins and a few other distributors they they've they've talked about a lot and as you said, anything in the UK, Wix, the kind of uh do-it-yourself home improvement. I've looked at that a few times and that looks very cheap, but you know, it's a retailer and it's got the home improvement play, but yeah, anything that touches the consumer, it's just crazy. And I I just these foreign fours, you look at them, you're like, "Hey, man, if the if these stocks don't go up, these guys aren't even like pushing it to the max on the buybacks." But if these if these stocks don't go up, you're going to get 10% of the stock bought back every year plus dividends and more free cash flow on top. Unless the whole thing goes into a depression, it's it's kind of hard to see how you get. And look, also the UK government I mean, you probably know more about it than me, but it seems like they they realize they're in a tough spot because they are starting to talk about, hey, the stamp taxes and everything, we need to repeal those. We need to be a better place for international capital, for domestic capital, that sort of stuff. So it seems like you've got a lot the the valuation's there. You've got a lot of the tailwinds, but Yeah. >> Yeah. And and you you mentioned the the new UK labor government, which has been there for about a year and a half now. Uh, I would say even though they're viewed as being, you know, a little bit business unfriendly for the homebuilders, I would say they've probably been a net positive because they have improved the um the planning uh the the the process for getting planning permission for for housing developments. Uh and and that actually is a little bit of a tailwind for the homebuilders. Even the business unfriendly parties I I think are increasingly starting to realize I mean you've got them here in America the the housing situation is at a breaking point and you see if they don't get a handle on it and they don't start approving like the one way to solve housing it's very simple build more housing I if they don't get a handle on that uh they're going to get voted out so even the business unfriendly ones I think are getting that last question there that is always an interesting one right like I think in the 2000 the late 2010s the home builders in the and I'm thinking domestic, not international. The home builders did well in part because the the housing uh building permits were so restrictive that you know prices were really ran and then you really saw it after co right but they they benefited from the restriction and it kind of reminds me of oil right like all these oil exacts want to drill baby drill and they want permits everywhere. It's kind of like be careful what you wish for. I'd love to end with that question to you on the UK. Like if you get more supportive policies that allow for more home building, is that a bull case or a bare case for these guys? >> I I think it is um net a net positive for them because they will be able to uh really turn over their their land banks faster and their volumes will go up. Uh I think it it'll it be a plus for the intrinsic value and maybe even more so for the stock prices. You're right though that you know the constrained supply in the UK which is mostly because of the a very difficult uh environment for getting planning permission for new developments that's that's a real underpin uh you know for their asset values uh and so you know bels you know bel trades at 89% of tangible book value and that's you know that's you know inherently valuable land uh and work in progress. I think you know just about you know you know almost you know every plot they own you know someday they or somebody probably themselves will build something on there and make money on it's um land is is just inherently valuable especially if it's bought reasonably intelligently. So on the one hand you know uh the constrained land supply it it really underpins the asset value. Uh uh on the other hand I I I I do think it would be a net [snorts] positive for them especially for the stock price if the volumes really started going up and and and I think the volumes would start going up. Uh although you you know that really also depends on on demand. Um and and I like I said before, I think it's just a matter of time before demand normalizes or the government uh comes out with a um demand stimulus program. This is something we didn't touch on. Think it's potential positive catalyst for the sector. Um we we have not had a demand stimulus program for new build housing in the UK for a couple of years now. That's actually quite unusual and and there's some speculation that the government would uh would create one at some point here in the next uh year or two perhaps. >> Perfect. But Christian, I think we did a nice job walking through I mean look, home building, it's a UK home building, it's a big sector, but it's not a crazy complex sector. I think we did a nice job walking through risk, rewards, opportunity. Obviously, Bellway was a focus, but I I always want to turn over to you. anything you think we should we just skipped over or anything you think we kind of glossed over we should hit harder. >> Um I I think we covered um the important stuff. I would just say sort of in summary that you know I I think the upside is is quite meaningful. You know I think you know Bellway I could easily see it trading at one and a half times book value and that book value is increasing even now with depressed demand. Uh so going from you know 89% of of book to you know maybe one and a half times book over the next couple years or the next few years. Uh with the compounding on top of that I think the upside is actually pretty nice and and and but and also I I would really stress this. I think um for a long-term investor I think the downside is is quite small. Um the you know this is a sleep well at night investment for me and so on a risk adjusted basis I I think it's it's really one of my favorite investments. >> Fantastic. Well look that's why I wanted to have you on. I love to have smart people come on to talk about their favorite investments. So Christian Olsson from Olsson Value Funds. This has been great. We'll have to have you on for a second podcast in the near future but appreciate you coming on to walk us through home building across the pond and we'll talk that soon. >> Thanks for having me. A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.