Investor/An insider's guide to the market:Housebuilder McInerney was the first of a number of Irish companies to publish financial results this week.

On Monday morning the company announced an excellent set of results for 2006. Earnings per share for the year came in at €140.6, which was an 18 per cent increase on last year and better than broker forecasts.

Private Irish housebuilding profits rose by 31 per cent to €49.4 million, representing 60 per cent of group earnings before interest and tax. The average selling price of a house in Ireland rose by 17 per cent to €285,000 and the operating profit margin improved significantly to 19.2 per cent from 15.4 per cent in 2005.

The company completed 1,025 houses in Ireland in 2006 and its Spanish operation delivered an operating profit of €4 million. However, Britain is now the main focus of the group's expansion plans where there was a sharp rise in completions to 980 new homes.

McInerney further underlined its focus on Britain with the announcement that it is acquiring Lancing Home for £16.25 million (€24.24 million) plus £3 million €4.5 million) debt. Lancing specialises in building affordable homes in Newcastle and Gateshead in northeast England. It has a landbank of 413 plots across four sites.

McInerney also announced a one-for-five rights issue at a price of €13, which will raise approximately €86.8 million. The funds raised will be used for the Lancing deal and to expand the group's operations in Britain.

From a relatively modest base, McInerney has been putting together a more meaningful scale of operation in Britain. Growth has occurred through both acquisition and expansion. Since 2002 completions have quadrupled, albeit from a low base.

Although the British market is fragmented, McInerney is still a minnow in a British context

Some perspective on this can be gleaned from the recent financial report of British housebuilder Persimmon. Its completions in 2006 totalled 16,701 houses with an average selling price of £188,129 (€280,617).

McInerney's average selling price was £140,000 (€208,827) for the 980 houses that it built in Britain last year. Persimmon reported the first few weeks' sales in 2007 as encouraging and said forward sales were 4 per cent ahead of 2006 levels. There is as yet no sign of any loss of purchaser confidence due to recent sterling interest rate increases.

Indeed the underlying supply- demand situation in Britain is one of scarcity. A restrictive planning regime has resulted in many years of relatively low volumes of new house production. In recent years, the influx of eastern European immigrants has been sufficient to add a further twist to this underling scarcity. Long-term studies of Britain's housing market point to a prolonged period of excess demand for housing.

Therefore, McInerney's strategy of concentrating its expansion into Britain should reward shareholders over the medium to long term. It is also apparent that at its current scale, McInerney's British operation is sub-optimal. The profit margin is low where it was only 7.6 per cent in 2006.

This compares with profit margins of 15-20 per cent in its Irish business and similar profit margins for other British builders.

As McInerney's British output grows, it should result in better profit margins, as fixed overheads are spread over a much larger number of house completions.

The company's strategy for Britain is focused on the first-time buyer market which is reflected in its average selling price being well below the national market average. Persimmon's average selling price in 2006 was £188,000 (€280,425) compared with McInerney's £140,000 (€209,000).

Affordability is a growing issue in Britain (and Ireland) and much of the increased demand for housing there is expected to be for smaller and cheaper houses.

McInerney's share price has had a good run recently and is now up by 13 per cent on the year to date. The stock currently trades on a prospective price-earnings (p/e) ratio of just over 10 and offers a dividend yield of 1.7 per cent. Persimmon trades on a PE of 9.5, although the average PE for the overall British housebuilding sector is 10.8. The only other Irish-quoted housebuilder is Abbey, which trades on a p/e of 10 and a dividend yield of 3 per cent. Although McInerney is priced in line with sector averages, Investor believes that it has got above-average growth prospects and that the shares should continue to perform well in 2007.

Investor says...

Although McInerney is priced in line with sector averages, Investor believes that it has got above-average growth prospects and that the shares should continue to perform well in 2007.