Interactive Investor

Here’s why housebuilders are surging today

13th April 2023 13:18

by Graeme Evans from interactive investor

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Housebuilding shares are down 50% since February 2020, but is the fall justified? A City bank thinks there’s value to be had after some big upgrades today.

Shares upgraded 600

Share price upsides of at least 40% have been forecast for Vistry Group (LSE:VTY) and Redrow (LSE:RDW) as a City bank today swung behind the building sector with a series of “buy“ recommendations.

HSBC analysts raised target prices by an average 29%, causing Barratt Developments (LSE:BDEV), Persimmon (LSE:PSN), Taylor Wimpey (LSE:TW.), Crest Nicholson (LSE:CRST), Redrow and Bellway (LSE:BWY) to be upgraded from “hold” to “buy” alongside partnerships specialist Vistry. 

London regeneration play Berkeley Group (LSE:BKG) also moved to “hold” from ”reduce” in a note that triggered heavy buying of stocks across the sector this morning. Only Persimmon bucked the buying trend as its shares went ex-dividend.

HSBC downgraded the building industry in September, but with more known about the shape of the housing market downturn it believes most shares now offer decent value.

It said: “We raise our target prices by an average 29%, implying the most upside for Redrow at 45% and Vistry at just under 40%, while our target prices on Bellway, Crest Nicholson and national volume builders Barratt, Persimmon and Taylor Wimpey, imply 23-30%."

HSBC says share prices for the eight housebuilders are on average some 50% below their pre-pandemic highs in February 2020, reflecting heavy selling in the first part of 2022 when the government tapped the sector to pay for fire safety remediation and the market discounted a downturn against the backdrop of the rising cost of money.

The investment bank continues to predict a 20% fall in completions for most housebuilders in 2024, versus 2022 levels. However, the overall picture is not as bleak as in the autumn when mortgage rates were surging and the UK looked to be heading for a recession.

HSBC said: "We now have greater visibility about the shape of the current housing market downturn for the housebuilders' profits and cash flows and their recovery from it, which we believe to be more than priced-in to share prices.”

Its preferred picks are partnerships play Vistry, market share gainer Redrow and national volume builder Taylor Wimpey. HSBC also notes that Vistry and Redrow's share prices have underperformed the sector's 4% rise since the beginning of September, whereas Taylor Wimpey has outperformed slightly with a high single digit rise since early September.

The bank added that Redrow and Persimmon offered the highest potential surplus capital return as a proportion of market capitalisation.

Today’s note comes a fortnight after broker Liberum said consensus estimates for most builders appear to be bottoming out as sales rates improve and pricing holds firm.

Liberum said it was too early to call the turn definitively, but said recent share price action had been revealing as stocks shrugged off the recent turmoil in the banking system.

It said house prices appear stable and that volumes are supported by improving sales rates, albeit constrained by site openings which are struggling against a less accommodative planning system and environmental legislation. Building cost inflation is also easing as some sub-contract labour rate reductions are reported, and material cost inflation moderates.

Liberum has “buy” recommendations on eight stocks in the sector, with its most preferred being Bellway with a target of 2860p, Vistry with a target of 950p and MJ Gleeson (LSE:GLE) at 560p.

The next key events in the sector are set to be trading updates from Persimmon (26 April), Taylor Wimpey (27 April) and Barratt (3 May), as well as the meeting of Bank of England policymakers on 11 May. Liberum said a pause in the recent run of rate rises could be significant for sentiment towards the sector.

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