Our top picks: Barratt and Taylor Wimpey.
Over the past year the share prices of UK Housebuilders have performed strongly. With the sector trading just over
NTAV the obvious valuation gap has closed. However with returns in the sector now showing evidence of strong
forward momentum, the easing of planning likely to allow continued access to higher margin land for longer, cash
returns to shareholders potentially becoming more of the norm, and what could be the first signs of an upturn in the
housing market supplemented by the new government programmes we believe the stock prices in the sector have
further to run. We remain positive on the housebuilders although recommend being selective.
We highlight 3 points from the budget and its implications for the housebuilders
1) “Help to Buy” could offer considerable support to volumes. In yesterday’s budget the UK government announced
“Help to Buy” - in the Chancellors own words a “dramatic” programme seeking to boost the economy through
targeted aid to the new build sector (through the greater use of shared equity), but also trying to kickstart the housing
market as a whole (through a guaranteed mortgage available across the whole market). Within this we see the
massive extension of the shared equity product of greatest importance, and while we remain cautious of the product
reaching the government’s targeted 30% additional volumes in the sector, we believe it ought to drive increases in
selling rates for the industry. 2) Only moderate growth assumptions drive up to 10% upside to DB ests . Given the slow
start seen to many of the government programmes for the sector in recent years at this stage we make only moderate
changes to our forecasts, moving selling rates to grow by approx 7-8% pa in 2014 and 2015 (from our previous 2%
estimates). However even on this more muted scale, the benefit of margin upside as the new land becomes a greater
part of the volumes, drives 10%+ PBT upgrades to our forecasts for 2015. 3) Increasing our price targets, providing up
to 25% upside. Reflecting our changes to earnings, alterations to our discounting and movements in the multiples we
have made changes to our price targets and continue to see opportunities for up to 25% upside to current stock
prices. With the greatest upside to our price targets our top picks are Barratt (BUY) and Taylor Wimpey (BUY). At this
time we have downgraded our recommendation for Berkeley from BUY to HOLD. While we still remain fully confident
in our forecasts for the stock (which remain 30%+ above consensus for FY 14), given the recent strong share price
performance we see lesser upside than elsewhere in the sector.
Valuation and risks
We value the sector based on NTAV discounted back to current levels and the value of the dividend streams. Risks to
the sector include the availability and affordability of mortgages, interest rate, unemployment rate and consumer
confidence, government funding and policy on planning, the timing and profitability of new land, changes in raw
material and labour pricing.