Interactive Investor

Housebuilders: two big shots still rated a ‘buy’

19th January 2021 15:23

Graeme Evans from interactive investor

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A sector recovery has hit a brick wall, but these stocks could return to pre-pandemic levels.

Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) have been kept on a City bank's ‘buy’ list after two of the biggest players in housebuilding eased investor jitters over the near-term outlook.

The positive reservation trends reported by the pair last week have helped to reassure UBS. That’s because these bookings are most likely to be for the period after the expiry of the government's stamp duty holiday at the end of March.

There was further encouragement for investors yesterday when it emerged Persimmon's new boss Dean Finch spent £50,000 on shares in his company at a price of 2,718p each.

The purchase backed up comments made by Finch a week earlier, when the former National Express chief reported strong levels of customer interest and a forward sales position some 24% higher than a year ago at £1.7 billion.

UBS believes Persimmon shares have the potential to be worth 3,070p, which would represent a return to pre-pandemic levels for the FTSE 100 company.

Analyst Greg Kuglitsch said the investment case is underpinned by a forecast return on capital employed of more than 40% and a high net cash balance of £1.2 billion, which should provide the opportunity to ramp up investment in order to grow the business.

Some of the caution around Persimmon concerns the recent drift in margins, which had been above 30% in the 2018/19 financial year. Kuglitsch sees scope for margins to recover from the 27% expected in 2020, but admits the issue is unlikely to go away any time soon.

Based on the 235p expected dividend for the 2021 financial year, he notes that Persimmon shares are yielding a “very attractive” 8.6%. Kuglitsch also expects Taylor Wimpey to reinstate its dividend with a 3.8p a share award alongside full-year results in March, and for the board to consider a special dividend worth £100 million for the following year.

Taylor has started 2021 with a record order book, having reported a 23% surge on the year before to £2.7 billion. It has also taken advantage of opportunities in the land market by agreeing terms on £1.3 billion of deals comprising 93 sites and 22,600 plots, potentially adding to volumes in 2023. 

The shares are ‘buy’ rated by UBS, with a price target of 210p compared with 162.35p today.

The Chancellor's stamp duty holiday on transactions below £500,000 has played a significant role in sustaining property market confidence. However, there are not believed to be any plans to extend the initiative, despite lobbying from buyers and estate agents among others.
 
Kuglitsch added: “Last week's trading updates have left us more optimistic about the near-term outlook. Reservation trends remain positive with bookings now mostly for beyond the end of March 2021, when the stamp duty holiday expires and the new Help-to-Buy scheme becomes effective.”

He is also positive on Vistry (LSE:VTY) after the FTSE 250 stock last week delivered a strong second half trading update, with 2020 profits expected to be at the top end of the forecast range.

The group, which used to be known as Bovis Homes, also intends to resume dividends 
with a modest payment alongside full-year results. UBS has a price target of 1,030p, which compares with 914p today.

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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