Interactive Investor

Time to buy these housebuilding stocks with 30% upside

21st December 2021 12:41

Graeme Evans from interactive investor

This team of City experts hasn’t been so positive on the housebuilding sector since the Financial Crisis. We reveal which stocks they’re backing and who their favourites are. 

Persimmon (LSE:PSN) and Taylor Wimpey (LSE:TW.) are among seven housebuilding stocks backed to go more than 30% higher as part of a City broker's clean sweep of “buy” recommendations in the sector.

Liberum's bullish note is built on hopes that wage growth of about 4% will trump cost of living increases and mortgage rate rises, resulting in house prices lifting another 3% in 2022.

For the first time since it began covering the sector in 2008, Liberum has “buy” ratings on all nine stocks after recently turning positive on London-focused builder Berkeley Group.

In a report published last week and before Monday's latest bout of stock market weakness, Liberum said shares in the sector were similar to levels seen in January, when an unemployment rate of 7% was being forecast compared with today's 4.2%.

It added: “Housebuilders' valuations are close to cycle lows, with the market over-discounting the known headwinds of rate rises, build-cost pressures and government policies.

“This combination should make for a much better performance from housebuilders' shares in the year ahead.”

The top two picks in Liberum's coverage are Persimmon and MJ Gleeson (LSE:GLE), where it sees potential upsides of 33% and 50% to 3,400p and 1,110p respectively.

On Persimmon, it sees a high-quality business with sector-leading returns and a strong balance sheet. Liberum also notes good exposure to first-time buyers and low-price points, where affordability is best. 

The case for MJ Gleeson is based on selling low-cost housing in a much-undersupplied market. Liberum said: “Its unique social purpose, bringing home ownership to low earners, key workers and young people should help sustain a premium valuation.”

The broker also sees potential total shareholder returns of more than 30% for Bellway (LSE:BWY), Crest Nicholson Holdings (LSE:CRST), Redrow (LSE:RDW), Taylor Wimpey and Vistry Group (LSE:VTY).

It describes Taylor Wimpey as having an extremely attractive valuation, which offers an attractive entry point for a self-help story. It also offers attractive dividends and adds that management change may be a catalyst for accelerated margin recovery. 

Liberum said: “Persimmon and Taylor Wimpey are our favourites among the large cap housebuilders. However, we find value more widely in the smaller housebuilders, which offer extremely attractive valuations.

“We favour housebuilders with a proven track record of volume growth and prefer northern exposure, low price points and strong balance sheets.”

FTSE 100-listed Barratt Developments (LSE:BDEV) and Berkeley Group (LSE:BKG) complete the set of “buy” recommendations, with potential upsides of 20% and 17%.

Liberum believes that the level of selling price inflation should be good enough to at least recover build cost inflation. Industry forecasts also point to a good level of housing transactions in 2022, down from the very strong level of this year but 4% above 2019.

The City, however, appears more sceptical, which Liberum thinks may be due to a London-centric view of house prices and a lack of appreciation for the barriers to entry that protect high returns.

It added: “The planning system is very hard for small builders to navigate and banking rules make it harder than ever for small builders to finance land purchases at reasonable rates.”

The market is worried about the impact of Help to Buy narrowing and then closing altogether from April 2023, but Liberum believes alternative measures will come in to take its place.

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