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Go for volume plays in housing market's next phase

Published: 13:17 03 Sep 2015 BST

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“Travis Perkins should gain from a prolonged up-cycle in residential RMI as years of underspend need correcting.

The housing market is about to get its “second wind”, according to Liberum Capital, as the economy picks up and consumer confidence grows.

Since the beginning of 2010, the FTSE Household Goods & Home index has shot up 142%, helped in no small part by the “Help to Buy” initiative, but now is not the time to bank profits, Liberum argues.

Although the housing market is likely to be “more balanced” from now on, the broker thinks the sector still has legs, especially with the Bank of England likely to delay its long threatened rate rise.

In Liberum’s June consumer survey, the key worry for home owners was the prospect of mortgage costs rising, but since the General Election that threat has receded; if the short sterling futures market is anything to go by, the timing of the first interest rate rise by the Bank of England has been pushed four months into the future and the timing of the second one by six months.

The stocks in the sector to back, in Liberum’s view, are those that benefit from increased activity rather than those that reap the rewards of higher prices.

The likes of residential maintenance and improvement (RMI) firms come into the former category, as do lenders and estate agencies, while house builders and residential property plays fall into the latter category.

“Against the backdrop of political stability, strong wage growth and more sustainable house price growth, we note a considerable pick up in volume indicators in the last few months – mortgage lending is at post-crisis highs, there was a flurry of approvals and transactions in June/July and re-mortgaging activity appears to be turning,” the Liberum analysts note, adding that home owners are bullish, expecting mid-single digit percentage price growth.

Although house price growth is obviously good news for house builders, their shares have already risen by more than 60% in absolute terms since the start of 2014, and the valuations are “a long way beyond previous highs”.

Bellway (LON:BWAY) is the only house builder with “meaningful upside” now, in the view of Liberum, which has a price target of 2,675p for a stock currently trading at 2,501p.

The broker prefers building materials suppliers and, in particular, Travis Perkins (LON:TPK), where Liberum’s price target of 2,500p is 460p or so above the current price level.

Travis Perkins should gain from a prolonged up-cycle in residential RMI as years of underspend need correcting. Lead indicators have recently been improving,” Liberum said.

In similar vein, Topps Tiles (LON:TPT) is set to benefit from the urge to spruce up the housing stock, while the shrinking of the estates of DIY specialists Homebase and B&Q should provide a boost.

The shares, at 160p, are extremely adjacent to Liberum’s 161p target price, but the broker maintains its ‘buy’ recommendation all the same.

It also likes temporary storage providers Big Yellow (LON:BIG) and Safestore (LON:SFE), which have the greatest exposure to improving residential indicators within the property sector.

Property listings web site Rightmove (LON:RMV) is the clear leader in its field, even with OntheMarket.com moving into its patch. The number of agencies on its books continues to increase, and should increase by another 8% by 2018, Liberum predicts.

Rightmove is rated a ‘buy’ with a price target of 4,295p.

Of the lenders, buy-to-let specialist Paragon (LON:PAG) is favoured, backed as it is by a strong balance sheet. The price target is 494p.

Lastly, M Winkworth (LON:WINK) is the pick among estate agents, with its London-focus and its dividend yield of more than 4% both proving attractive.

‘Buy’ is Liberum’s advice, all the way up to 200p from the current share price of 151p.

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