Description

Countryside is a high-quality, growing business that we think can compound at 20% or more for the next decade.  After a push from activist investors, Countryside recently announced a gradual exit from the homebuilding business to focus entirely on its partnerships division, which works with local authorities in the UK to deliver affordable housing.  Partnerships is a significantly better business than homebuilding and will be Countryside’s entire focus going forward.   In recent months the company also started buying back shares aggressively and announced a new Chairman with a track record of value creation. 

The partnerships division generates high returns on capital (50%+), has meaningful barriers to entry, and will likely grow for many years due to the UK’s need for more affordable housing.  As Countryside transitions away from being viewed as a cyclical, capital-intensive homebuilder, it's possible the valuation may rerate, which would lead to meaningfully higher returns.   

History

Countryside began as a homebuilder founded by Alan Cherry in 1958.  Ownership changed hands a few times over the years, including a majority purchase by Oaktree Capital in 2013, which later exited in 2018.  Countryside’s homebuilding division acts like other homebuilders: they buy land, get permits from the government, and build and sell units to private homeowners.  The partnerships division effectively forms JVs with local housing authorities to develop land with a mix of affordable public housing, rental units, and private homes. 

Public housing has a significant role in the UK market, representing 17% of UK households as of 2010.  These are owned and managed by local authorities, who are often land rich but cash poor.  These local organizations often donate the land to JVs with Countryside, with the company providing some working capital and the expertise to build the units and manage community relations.  These are long-term agreements with high returns on capital baked in for Countryside, despite lower absolute margins than the homebuilding business. 

Countryside’s partnerships business is a leader in the space and difficult to replicate.  Local authorities typically want to work with a firm with an established track record, and the bidding and approval process takes a long time.   A new entrant could go 6-7 years before earning a single dollar in revenue from these types of partnerships.  There are benefits to scale as well – Countryside has the experience and resources to manage large and varied construction projects, community engagement, sales and marketing, etc.  Many homebuilders also appear concerned with the lower margins in the partnerships business, despite the higher returns on capital and predictability.     

As a result of the long-term nature of the partnerships, Countryside has a large pipeline of existing projects, representing over 40,000 units, or roughly nine years of deliveries at its current size.  The UK needs more affordable housing, so these numbers should continue to grow.  In addition to the need for new housing, a large portion of the UK’s public housing was built in the post-war era and needs redevelopment.    

https://www.theguardian.com/business/ng-interactive/2021/mar/31/uk-housing-crisis-how-did-owning-a-home-become-unaffordable

https://www.theguardian.com/business/2021/apr/01/how-do-we-fix-the-uk-housing-crisis-experts

https://commonslibrary.parliament.uk/research-briefings/cbp-7671/

Activism

In December 2020, Browning West LP announced a 9.4% stake in Countryside and publicly called for three things: 1) the appointment of Browning West PM Usman Nabi to the board, 2) a search to find a new board chair, and 3) a mandate for the new board chair to get Countryside out of the homebuilding business to focus on the partnerships division.  Nabi is an experienced, hands-on investor who has served on the boards of Domino’s Pizza Group plc, Six Flags, and Tempur Sealy during his career at Browning West and H Partners. 

Browning West released a deck publicly at the time, including the slides below:

In April of this year, David Capital also disclosed a 4.6% stake and came out in support of Browning West’s proposals.  Later that month, Countryside announced John Martin as new board chair.  Martin also serves on the board of Ocado and was previously the CEO at Ferguson plc, where he had a strong track record. Browning West put out a statement supporting the decision. 

In early July, Countryside announced a gradual wind-down of the homebuilding division, with the assets either sold or redeployed into the partnerships business.  Countryside estimates that this will generate at least £450 million of proceeds and an additional £60 million of operating profit in the partnerships business by 2023.  The company also announced its intention to return the cash proceeds via share buybacks, which began later in July.  Since July 26th, the company has repurchased shares every day, representing about 12% of volume on average.  So far, they have spent around £19 million to buy 3.4 million shares in just over a month. 

While Nabi has not been appointed to the board, the activists have achieved two of their primary goals in a short period of time, and I wouldn’t be surprised if he ultimately makes it onto the board.  There is also an opportunity to improve the company’s investor relations – for example, despite the company’s growing list of US-based shareholders, the July announcement about the strategy change was released at 2 am ET with a call held an hour later.  Despite a market cap of almost $4 billion and daily volume of around $10 million, the company is mostly covered by smaller regional sell-side firms. 

Valuation

There is a wide range of outcomes, but in our base case, by 2030, Countryside can deliver over 20,000 completed units with an operating margin of 15%.  That would lead to net income of almost £900 million, compared to a market cap today of £2.9 billion.  Valued at 15x forward earnings, and with roughly ¼ of shares repurchased by then, shares could reach £36/share for an IRR of approximately 22%. 

We don’t think the above scenario is wildly optimistic.  Our base case is about 10% below the company’s guidance to hit 8,000 units by 2023.  The activists have pointed out that high growth, high ROIC companies in the UK like the new Countryside often trade with P/Es of 30+ (see below, from the deck Browning West released).  It’s also possible this could become an ESG story – Jeff Ubben’s new ESG fund, Inclusive Capital, recently showed up on the shareholder register. 

That’s all nice to consider, and seems possible if the company continues to grow and generate high returns on capital, but you don’t need a big multiple to do well here. 

Risks

Competition increasing over the next 5-10 years is our biggest worry.  The pie is big and growing, and there are barriers to entry, but it’s not impossible over longer time frames.  While it hasn’t happened in any meaningful way yet, if Countryside succeeds with its focus on partnerships and is rewarded with a higher multiple, other large homebuilders might try to enter the field.    

There could be some short-term hiccups with the transition from homebuilding to partnerships, particularly trying to build affordable housing and rental units on land bought initially for private homes.  Countryside should have a good feeling for which plots are best to sell to other homebuilders and which could have interest from local authorities in a partnership.       

The nice part with any short-term risk is that the company is now buying back shares aggressively, so a lower stock price in the short-term might not be the worst thing as long as the company executes its long-term plan.  If Countryside remains focused on growing its leadership position in UK partnerships, we expect an excellent outcome for shareholders over the next 5-10 years.

Catalyst

High growth and ROIC in the coming years from new focus on partnerships 

Buybacks