Interactive Investor

Lloyds rallies as two house builders show value

14th June 2022 12:57

Graeme Evans from interactive investor

The economic storm clouds parted a little to give two banks and two of housebuilding’s ‘cheapest’ stocks a day in the sun.

Lloyds Banking Group (LSE:LLOY), NatWest (LSE:NWG) and other stocks with reliance on the UK economy have been given a much-needed lift after robust updates from the housing and jobs markets today.

Shares in the mortgage lenders improved in an otherwise struggling market after builder Crest Nicholson (LSE:CRST) surprised investors with annual profits guidance 5%-10% stronger than consensus and rival Bellway (LSE:BWY) pitched in with a trading update in line with expectations.

Worries over debt defaults as the economy comes under strain from higher costs and interest rates were also eased to a degree by further signs of resilience in the labour market after ONS statisticians reported job vacancies at a record high of 1.3 million.

The unemployment rate is still near its recent 47-year low and wage growth remains reasonably strong, which together might be sufficient to persuade the Bank of England to go harder on interest rates with a half a percentage point rise on Thursday. 

Any such tightening has the potential to boost Lloyds and NatWest, although so far this year their share prices have decoupled from the usual benefit of margin-enhancing rate rises.

Housebuilders are in a similar state after an average fall in share prices of 25% in the year-to-date, even though forecasts from the main players have been robust and there’s continued evidence of consolidation in the sector.

A day after Countryside Partnerships (LSE:CSP) put itself up for sale, analysts at Peel Hunt said price multiples have dropped sufficiently to make another four firms vulnerable to bids. It noted there had been eight significant private equity firms deals since early 2021.

The broker said: “We do not think mergers between any of the big four housebuilders are likely. However, we could see some of the majors invest in niche parts of the markets to which they have no exposure.

“Private equity firms who have bid and failed to land one of the recent deals may well still be interested, while there is scope for the recent private equity deals to be bulked up.”

Peel Hunt said Crest Nicholson trades with the biggest discount on 0.71 times net asset value, compared with a sector on 1.18 times down from a 10-year average of 1.49 times. The next stock is Bellway on 0.75 times, then Redrow (LSE:RDW) at 0.82 and Springfield (LSE:SPR) at 0.98.

Two of the four stocks were in the spotlight today as Crest and Bellway boosted their lowly valuations with gains of 17p to 272p and 58p to 2,267p respectively.

Crest Nicholson delivered first-half revenues of £364.3 million, 12.3% ahead of the prior year, as completions grew 7.8% to 1,096. Adjusted pre-tax profits rose 45% to £52.5 million and the company now expects the full year to be a consensus-beating £135-£140 million.

It said: “The board remains convinced that, despite the current global economic and geopolitical volatility, the long-term fundamentals of the UK housing market remain strong.”

Peel Hunt has a target price of 400p, while UBS has a “buy” recommendation at 370p.

The two brokers are also positive on Bellway, which today reported a 2.6% rise in reservations despite a 10% drop in its number of operating sites. Price rises have also continued to offset cost inflation.

Chief executive Jason Honeyman said: “Demand is strong, reservations are ahead of last year and our order book remains substantial.”

The utilisation of Help-to-Buy continues to fall, having been used by customers in 16% of transactions compared with 22% in 2021 and 39% in 2020. 

But with the availability of “responsible, higher loan-to-value mortgage lending” gradually improving, Bellway believes it will be able to mitigate the withdrawal of Help-to-Buy for completions beyond next March.

The company’s forward order book rose in value today by 27.3% to £2.4 billion and comprises 8,152 homes, up from 6,763 the year before.

Peel Hunt said: “Although the market is clearly expecting a slowing of demand and a drop in profitability, Bellway has a decent buffer, while its balance sheet remains in good shape.”

The Newcastle-based builder recently announced a 28.6% increase in its interim dividend to 45p a share, which will be paid to shareholders on 1 July.

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