For investors with patience and perhaps a touch of optimism about the UK housing market, UBS thinks Barratt Redrow PLC (LSE:BTRW) may have laid the foundations for a decent recovery.
The broker has kept its buy rating on the country’s biggest housebuilder, setting a price target of 470p, about 21% above where the shares currently trade.
At 385p, the stock is down 18% over the past year and, by UBS’s sums, looks cheap at 0.85 times its tangible net asset value. The long-term average is closer to 1.1 times.
Julian Radlinger, the analyst behind the note, reckons the market is too gloomy. The current share price implies long-term profit margins of about 12.5%, compared with an average of 15% over the past decade.
“We see attractive upside potential given a heavily discounted valuation, Barratt Redrow’s scale advantage and material earnings growth potential as UK macro improves,” he wrote.
UBS expects profits to dip in the short term as the housing market adjusts to higher mortgage rates and pre-budget uncertainty.
It forecasts pre-tax profit of about £605m in 2026, rising to £1.26bn by 2030 if sales outlets expand as planned and margins recover towards 16%. That would still be below the 18–20% margins seen in the boom years before the merger with Redrow.
A stricter approach to buying land, now targeting a 24% return on new sites, should help underpin those gains. UBS assumes sales outlets rise from 395 this year to 500 by 2030 as integration synergies come through and planning constraints ease.
The valuation work, based on a return-on-capital model, is a touch more cautious than before.
UBS has lifted its discount rate to 10% from 9.25% and trimmed its long-term return assumptions, cutting the target from 565p. Even so, it still sees room for re-rating “as UK macro improves and as the company delivers site growth and margin recovery”.
Barratt Redrow may not be out of the cycle’s trough yet, but for those prepared to wait for interest rates and sentiment to settle, the foundations for future growth look sturdier than the market seems to think.