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Liberum upgrades three housebuilders to 'Buy' as it sees upside from smooth Brexit outweigh no-deal risks

In a note to clients, the broker upgraded Barratt, Bovis Homes, and Crest Nicholson to ‘Buy’ from ‘Hold’ off what it said was an upside of “at least 20%” if a smooth Brexit materialised
Houses
Despite the upgrades, only Crest escaped a target price cut across the board

Analysts at City broker Liberum have upgraded three housebuilders to ‘Buy’ from ‘Hold’ as it saw an upside for the sector from a smooth Brexit, while any downside from a disorderly exit had already been priced in.

In a note to clients, the broker upgraded Barratt Developments PLC (LON:BDEV), Bovis Homes Group PLC (LON:BVS), and Crest Nicholson Holdings PLC (LON:CRST) to ‘Buy’ from ‘Hold’ off the back of what it said was an upside of “at least 20%” if a smooth Brexit materialised.

Analysts added that the shares now showed “extreme value” following a 26% slump in 2018, with a de-rating from 2x to 1.3x book value as the risk of a disorderly Brexit rose over the year.

“Valuations are now very depressed and this would significantly de-risk the outlook. Although the market is likely to be dull, it should be good enough for builders to continue volume growth where able and maintain margins by taking advantage of lower land prices and re-engineering houses”.

Some upgrades, but only Crest escapes target price scythe

However, despite the upgraded ratings, Liberum chopped target prices almost across the board, knocking Barratt to 500p from 525p, Bellway PLC (LON:BWY) to 3,500p from 4,080p, Berkeley Group Holdings PLC (LON:BKG) to 3,400p from 3,910p, Bovis to 910p from 1100p, Galliford Try plc (LON:GFRD) to 970p from 1077p, MJ Gleeson PLC (LON:GLE) to 835p from 884p, Persimmon PLC (LON:PSN) to 2,700p from 2,840p, Redrow plc (LON:RDW) to 600p from 700p, and Taylor Wimpey PLC (LON:TW.) to 130p from 190p.

The only firm to escape the scissors was Crest Nicholson, which had its target upped to 400p from 331p.

“We see potential upside of 20% to our target prices (or 29% including dividends) and would expect these to be reached quite quickly in a smooth transition Brexit scenario,” Liberum said.

In terms of downsides, the broker said a disorderly ‘no-deal’ Brexit in a “prudent scenario” could see house prices fall 10% and volume 20%.

“Allowing housebuilders scope for some mitigating action, we find that earnings would fall around 40% from our central estimate in this scenario.”

“This would mean the sector trading not at 7x P/E [price/earnings ratio], but 14x. Historical cycles have seen multiples of over 13x trough earnings, so this could mean that significant plausible downside risk is already discounted”.

Persimmon, Bellway, and Gleeson top picks but London weighs on Berkeley

Liberum pegged Persimmon, Bellway, and MJ Gleeson as top picks in the sector, leaving Berkeley and Taylor Wimpey as its least preferred.

Persimmon’s high margins and geographic exposure were cited as key points, while Bellway and Gleeson were pegged with volume growth and a unique business model respectively.

Meanwhile, Berkeley’s exposure to high price points in London was cited as a weight on its shares, while analysts said they saw risk in Taylor Wimpey’s strategy which was “compelling at a high level – seeking to put the customer first, improve quality and speed up the turn on big sites –but we find it lacking in clarity, which constrains the confidence we have in delivery”.

In late-morning trading Thursday, Barratt shares were down 2.1% at 463.7p, Bovis shares were down 1.2% at 869.2p, and Crest Nicholson shares were up 1.7% at 342.8p.

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