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Analysts can’t make their mind up about housebuilders

UBS and Shore Capital both acknowledge that trading is likely to get tougher for housebuilders but they also reckon that the market has knocked a bit too much off their share prices
builder on house
Housebuilders’ shares are broadly lower today

The RICS residential property market survey for November did not make good reading for UK housebuilders.

Nor did the mixed messages in two big research notes from UBS and Shore Capital, the latter previously well-known for its rose-tinted view of the sector.

RICS – the Royal Institution of Chartered Surveyors – said its monthly indicators for housing demand, supply and prices hit multi-year lows in November.

READ: Liberum upgrades three housebuilders

One of the key takeaways from the report was that average house prices are expected to fall further over the next few months before stabilising.

That’s obviously not great news for housebuilders, whose profits are determined by how much they can build homes for and how much they can sell them for.

With input costs – labour, raw materials etc – on the rise, margins are likely to soon come under pressure and fall back from their current highs.

The average housebuilder margin is about 22% right now, while return on capital employed – a measure of profitability – is also close to all-time highs at 27%.

Margins have peaked

UBS thinks that margins and ROCE have both peaked and expect both to “normalise”, with ROCE easing back towards 19% when Help to Buy ends in 2023.

“However, we think the market is now pricing in a substantial decline in earnings/returns which we think offers good risk/reward across most of the sector,” read a note to clients.

“The dividend yield of 10% is also attractive in our view, and underpinned by robust balance sheets which are mostly ungeared / lowly geared.”

That didn’t stop the analysts slashing their price targets though as they conceded that housebuilder stocks are likely to remain volatile until there is any real breakthrough with Brexit.

They lopped 21% off the Bovis Homes PLC (LON:BVS) target which now stands at 860p (from 1,090p), while Taylor Wimpey PLC’s (LON:TW.) price target was knocked 11% lower to 190p (from 213p).

Out of the whole sector, only Berkeley Group Holdings PLC (LON:BKG) (4,600p) and McCarthy & Stone PLC (LON:MCS) avoided any downward revisions.

‘Profits could fall by 25%’

Well-known housebuilder bull Robin Hardy, an analyst at Shore Capital, took a surprisingly downbeat tone with his latest note and is now just “cautiously positive” on the industry.

“We have been forecasting a slow fade on profits after 2018 for some time on the back of weaker pricing and falling margins, but we now believe that the impact will be greater than we previously modelled,” he wrote.

“While we had modelled that margins might step back by around 100-150bps by the end of 2020, which would see profits lowered by 5-8%, we now believe that actual and effective prices could easily fall by 5% - this would mean that profits could fall by more than 25%.”

Like his peers over at UBS, though, Hardy thinks housebuilders’ shares have been knocked down too far, which leaves space for some upside.

Looking into early 2019 we believe that the sector is likely to experience a bounce both from more realistic forecasting and a less nervous view of Brexit,” he added as he moved every company in the sector, apart from Berkeley (‘hold’), up to a ‘buy’.

Bovis shares were down 2% to 859p in early afternoon trading, Taylor Wimpey edged 0.2% lower to 136.1p, while McCarthy & Stone dipped 0.4% to 138.5p.

Berkeley was one of the sector’s only risers, up 0.5% to 3,518p.

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Bovis Homes Timeline

Article
February 28 2019

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