Interactive Investor

Can these housebuilders unlock further upside?

14th February 2023 13:20

Graeme Evans from interactive investor

Has the rally for housebuilding valuations run its course? Find out the three stocks the City thinks can deliver further upside.

Cracks are showing in the recovery of housebuilding stocks after investors were urged to be selective and focus on the companies most likely to outperform the sector.

Broker Liberum said this week it feels most confident about Vistry Group (LSE:VTY) and MJ Gleeson (LSE:GLE) due to the difference of their offer, as well as Bellway (LSE:BWY) because of an excessive sector discount.

The City firm sees further upside generally, although the gap to the target prices on its other “buy” recommendations including Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) has narrowed after valuations surged by around third from their autumn lows.

Sentiment has benefited from a softening in mortgage rates and growth in wages, with last week’s updates from Barratt, Redrow (LSE:RDW) and Bellway noting improved demand in January.

Liberum said: “It is too early yet to have a definitive view of the crucial spring selling season, but news of better sales rates and the market strengthening through January are helpful.”

Selling prices are so far holding up but pressure on volumes as housebuilders struggle to increase their active sites means the broker has reduced its earnings estimates for 2023.

Counterparts at Deutsche Bank believe that some builders will see a 40% drop in volumes this year, which combined with an anticipated fall in prices in the mid-to-high single digits means that the recent rally for shares has run its course.

In a note that sent industry shares sharply lower yesterday, the bank ditched its “buy” recommendations on Barratt, Taylor Wimpey (LSE:TW.), Redrow and Crest Nicholson Holdings (LSE:CRST) and switched Persimmon from “hold” to “sell”.

Bellway survived the cull as Deutsche Bank kept a “buy” rating and also increased its price target from 2,167p to 2,522p. 

The move comes after the builder reported a “robust” performance for the six months to 31 January, with record completions of 5,695 homes and a 1.6% increase in the average selling price to £316,900.

The reservation rate reduced by 31.7% to 138 per week, but Bellway noted a pick up in January that reflected an easing of affordability pressures as well as seasonal trends.

Liberum has a price target of 2,860p on Bellway, which it regards as trading with an excessive sector discount. It added: “We like Bellway for its strong balance sheet, lowly relative valuation, strong operational management team, and balanced portfolio.”

The broker also favours the low-cost provider MJ Gleeson ahead of a trading update on Thursday, as well as Vistry due to a strong position in the high-growth partnerships sector. 

Liberum believes Gleeson’s Homes division will soon grow much more quickly than peers given the underserved market in which it operates, adding that its growth is much less capital absorptive.

Liberum added: “Vistry is another stock where a premium should be re-established to the sector. Partnerships should prove its resilience and premium growth in 2023, helping Vistry’s returns hold up much better than peers.”

In November, Vistry completed the acquisition of Countryside Partnerships in a move that will deliver thousands of homes a year for both the open market and the affordable housing sector. 

Liberum sees 21% upside for Vistry’s shares to 950p, alongside growth of 25% to 560p for Gleeson. Its other “buy” recommendations are Barratt with a target of 535p, Berkeley Group (LSE:BKG) at 4,750p, Crest Nicholson at 285p, Persimmon at 1,600p and Redrow at 610p. Taylor Wimpey has a “hold” rating and target price of 125p.

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