Housebuilders triumphant as City backs the sector

by Graeme Evans from interactive investor |

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UBS has a ‘buy’ recommendation on six stocks. Here’s why.

A resurgent housebuilding sector has been backed for further upside after a City bank reiterated ‘buy’ recommendations on six stocks, including Berkeley Group (LSE:BKG) and Taylor Wimpey (LSE:TW.).

The other UBS picks are Redrow (LSE:RDW), Vistry Group (LSE:VTY), Barratt Developments (LSE:BDEV) and Bellway (LSE:BWY). However, the Swiss bank has downgraded Persimmon (LSE:PSN) to ‘neutral’ and Crest Nicholson (LSE:CRST) to ‘sell’ after a strong run across the sector on the back of government support and robust underlying demand.

Analyst Gregor Kuglitsch sees a potential further upside of about 15% on average, but warns  higher corporation tax and a re-cladding levy from 2022 could negatively impact the attractiveness of the sector.             

Shares were hit by jitters in February when the government announced plans to raise £2 billion over 10 years to help pay for cladding remediation costs, implying a profit levy of around 3% on the listed housebuilders.

Alongside corporation tax, these two factors have the potential to raise the tax rate to around 28% from 2023 onwards, compared with 19% today. This equates to an 11% cut in earnings per share, although this is not fully reflected in UBS's latest 2021-25 forecasts due to upward revisions stemming from higher volumes and margin optimism in recent 2020 results.

On average, UBS's price targets are cut by 2%. It notes that the sector is trading on 1.6 times net asset value, which is below the peak of two times but above the long-term average of 1.2.

Kuglitsch said there were a number of positive fundamentals supporting sector valuations, including the ongoing help for first-time buyers and increasingly attractive returns being achieved by building firms.

He added: “We are encouraged by trading conditions which have remained solid in Q4 2020 and  Q1 2021 despite the effective tapering of government incentives, demonstrating strong underlying demand for properties in the UK.”

The biggest potential share price upside in UBS's coverage is Redrow, which Kuglitsch sees as a cheap way to play a staged recovery in the sector. The shares currently trade at a 30% discount to peers, with UBS seeing the potential for a 36% rise to 810p.

Berkeley is also regarded as attractively valued, particularly based on its “unrivalled” land bank in London and the South East and a strong long-term track record. UBS has a price target of 5,240p, which represents a potential upside of 25%.

Taylor Wimpey's price target of 215p is 22% higher after UBS upgraded its profits forecast for this year by 12% and noted the company's strong progress towards margins of 22% by 2023.

Among other large-cap housebuilders, Barratt Developments has a 12% upside to 810p, but Persimmon now looks to have fully priced in its attractive margin and return profile.

Mid-cap housebuilders Bellway and Vistry have potential gains of 16% and 18% respectively, but Crest Nicholson is regarded as a “turnaround story with execution risks”. The price target has been reduced by 5p to 315p, representing a 15% downside.

UBS said: “Crest Nicholson looks expensive, in particular relative to other mid-caps, and seems to more than price in a margin recovery towards the peer average despite execution risk.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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