Shares in housebuilding companies and building materials suppliers currently offer a “significant” investment opportunity, some analysts believe, as they expect the industry to survive the impact of coronavirus.
Investment bank Jefferies slashed its estimates for earnings per share for UK housebuilders sector by around 15-25% for the current year as it predicted a 15% reduction in the volume of home sales.
Last week, Berkeley Group Holdings PLC (LON:BKG) shelved its extra £455mln shareholder payout “until there is greater clarity” about the impact of coronavirus on UK economic activity, saying there had been “no noticeable impact” on its business to date to that point.
But on Thursday Crest Nicolson Holdings PLC (LON:CRST) was the first housebuilder to put its head above the parapet since the UK government announced stringent social distancing measures to prevent the spread of the pandemic.
Crest also pulled its final dividend as it expects the UK coronavirus lockdown to severely curtail housing production and customer visits, saying it was also suspending financial guidance “until both the severity and duration of the Covid-19 impact becomes clearer”.
This led to share prices across the sector adding to further falls, taking declines to more than 50% for most names over the past four weeks.
At broker Peel Hunt, analysts noted that housebuilders have operational gearing of “only circa 1.5” due to generally high levels of variable costs.
“So if there was no activity for two months then we would be looking at lost revenue of circa 30% currently and probably a 30% drop in profits with some lower price assumptions to be factored on top,” the Peel Hunt analysts said.
Jefferies sees buying opportunity
Analysts at Jefferies said they believe this has brought a “significant opportunity” and so upgraded to ‘buy’ almost all the stocks under their covered in the UK housebuilder and building material sub-sectors.
“At valuations not seen since the week after the Brexit vote - and we believe reflecting circa 12% house price declines - we believe this is too cheap for a sector forecast to continue to achieve a [return on capital employed] greater than 20%.”
Favoured picks among the builders are Persimmon PLC (LON:PSN) and Berkeley Group for their “lower risk profile due to strength of balance sheet”; Redrow plc (LON:RDW) for its low valuation on book value despite strong return on capital profile; and Countryside Properties PLC (LON:CSP) for its “more resilient end-user profile”.
For the longer-term investor, the analysts continue to prefer Polypipe Group PLC (LON:POLY) “given its exposure to ESG-led structural growth”, with the shares down only 25% in the year to date so upside to the Jefferies target price is not as large as the others.