After posting full year results well ahead of expectations, Abbey (ABBY:AIM) should continue to capitalise on the ongoing momentum in its markets. Investors should take advantage of valuation discrepancies while the market is still giving the stock insufficient credit compared with its more fully valued peers in the housebuilding sector.

Abbey’s share price has advanced a modest 10% year-to-date and given supportive market conditions and its healthy balance sheet we agree with housebroker Davy when they posit that ‘there is still a significant valuation gap between the company and the UK building sector’.

The group’s UK housebuilding operation has proved the stellar performer. Out of a total of 557 completed house sales in the year, 514 came from the UK. Trading in the UK housebuilding segment for the year to the end of April has certainly been buoyant and sales continued to be supported by the government’s ‘Help to Buy’ scheme.

Significantly, Abbey was also able to confirm that the recent general election did not dampen activity and house price inflation continues to offset rising input costs like labour and materials.

Aside from a geographically diversified housebuilding operation, Abbey can also look to revenue streams in plant hire as well as a tidy little rental income.

Looking ahead, at least in the short term, market fundamentals would certainly appear supportive of further earnings growth. Abbey is confident its forward sales in the new year are in line with budgets and the group started its new year with a cash cushion of €67.4 million together with €13.5 million in UK government bonds. During the year UK division increased its land bank to 1,557 plots with planning permission.

Davy is upping its full year 2015/16 pre-tax profit estimates for Abbey by 17% from €33.7 million to €39.3 million. The main drivers of the upgrade are, they say, ‘a c.5% increase in expected volumes in UK housebuilding from 475 to 500 completions, an increase in our expected operating margin for UK building to 21% from 20%’.

Abbey does sound a note of caution in the longer term, suggesting that the UK housing market may already be past its sweet spot: ‘House prices in the UK now reflect the easy money conditions of the last two years and may struggle to advance rapidly in an environment of rising interest rates and possibly lagging wage growth. Costs impacted by both labour and material supply bottle necks may continue to rise quickly.’

Abbey looks cheap with Davy Research estimating the company is on a price-to-book valuation of 1.17 times and at a significant discount to the wider sector.

SWOT ANALYSIS

STRENGTHS

• Healthy balance sheet

• Growing landbank

WEAKNESSES

• Vulnerable to property market volatility

• Ongoing margin pressures

OPPORTUNITIES

• Recovering Irish market

• UK market remains

supportive

THREATS

• Rising input costs

• Market competition