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Housebuilders construct some good gains after first post-election trading update proves reassuring

Investors have been worried about softer confidence among home buyers in the wake of the surprise UK election call in April, together with the ongoing uncertainties over Brexit
Bellway builder
But George Salmon, equity analyst at Hargreaves Lansdown, said: "Results like these add weight to the argument that, barring a sudden rise in interest rates, demand for new homes will remain buoyant"

Housebuilders constructed some good gains today after the first post-election trading update from the sector proved reassuring, with Bellway PLC (LON:BWY) saying demand for its homes did not slow in the run-up to last week’s polling day.

Investors have been worried about softer confidence among home buyers in the wake of the surprise UK election call in April, together with the ongoing uncertainties over Brexit, as recent house price surveys have shown declines.

READ: Bellway says demand did not slow in the run-up to the general election

George Salmon, equity analyst at Hargreaves Lansdown, said: “There is something of an arm-wrestle going on within the UK’s housing market at the moment.

“Recent figures from both Nationwide and Halifax show prices falling, while political uncertainty has added to the concerns.

“However, the housebuilders have released a relentless string of positive updates, and these numbers from Bellway are very encouraging too. Reservation rates are impressive, and its guidance for the future is upbeat to say the least.”

He added: “Results like these add weight to the argument that, barring a sudden rise in interest rates, demand for new homes will remain buoyant.

“After all, the fires of demand are being stoked by supportive government policies and a sharp supply-demand imbalance.”

Highlighting this, Ted Ayres, Bellway’s chief executive said: “Robust market conditions, together with a clear operational focus, is enabling Bellway to continue increasing its contribution to the supply of much needed new homes.”

‘Degree of instability’ from election result

Although in its statement, the FTSE 250-listed group did also say that prime minister Theresa May's failure to win an outright majority in the election had caused "a degree of instability" and there was "wider uncertainty" as the Brexit negotiations with the European Union begin.

However, AJ Bell investment director Russ Mould, noted: “While the (Bellway) trading statement acknowledges the General Election result and the imminent negotiations with the European Union on Brexit, it does so a long way down the page – perhaps providing a tacit reminder to investors that profits and cash flow ultimately drive company share prices rather than political considerations and that the priced paid to access that cash flow will in turn dictate the return made from any shareholding.”

 

 

2017E

2017E

Dividend cover

Historic

 

PE (x)

Dividend yield (%)

(x)

Price/book (x)

Barratt Develop.

10.0 x

6.9%

1.45 x

1.5 x

Bellway

8.6 x

3.8%

3.02 x

1.8 x

Berkeley Homes

7.4 x

6.1%

2.20 x

2.5 x

Bovis

12.4 x

4.7%

1.73 x

1.2 x

Countryside Properties

12.3 x

2.4%

3.34 x

2.4 x

Crest Nicholson

8.8 x

5.8%

1.96 x

2.0 x

Persimmon

11.1 x

5.3%

1.71 x

2.7 x

Redrow

8.4 x

2.7%

4.47 x

2.0 x

Taylor Wimpey

10.0 x

7.2%

1.39 x

2.1 x

AVERAGE

9.9 x

5.0%

2.36 x

2.0 x


Mould added: “If the builders keep delivering strong earnings and cash flows their shares should respond, supporting the view of those investors who argue that Brexit fears are overdone, the overall impact on the UK economy will be minimal and that domestically-facing sectors such as house builders, construction and real estate could offer value, even as the UK’s headline indices trade at or near all-time highs.”

Housebulders’ shares show knee-jerk reaction

Bellway was a top FTSE 250 gainer in late morning trading, with its shares up 4.4% at 2,976p, heading a rally by other housebuilders, with mid cap peer Redrow plc (LON:RDW) gaining 2.7% at 562p, while blue chip Persimmon PLC (LON:PSN) added 2% at 2,439p.

In a note to clients, Shore Capital analyst Robin Hardy said: “The house builders are typically prone to show knee-jerk reactions to positive news regardless of valuations and we would expect Bellway to mark a little higher this morning but overall we remain cautious on the sector on valuation grounds.

“Bellway, which is still just a midcap, shows better relative value than the sector’s large caps and could be a target for intra-sector rotation out of large cap into midcap for those looking to hold a weighting in the sector but we see limited absolute upside and would even consider taking profits into any significant rally.”

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