Broker Liberum today claimed that homebuilders are significantly undervalued, with share prices down 45% since February 2020.
Charlie Campbell, an analyst at the broker, predicts “resilient” trading among homebuilders this quarter, even if sales slow following a recent shortage of raw materials.
Homebuilders Barratt Developments PLC (LSE:BDEV), Persimmon PLC (LSE:PSN), Vistry Group PLC (LSE:VTY) and MJ Gleeson (LSE:GLE) are all expected to give trading updates over the next fortnight, and any drop in turnover is unlikely to spell disaster, the broker said.
“The industry’s main obstacle now appears to be planning delays,” Campbell said in a note today. “We are convinced that macro-economic challenges will not end but only slow the housing cycle.”
Material availability in the first half of the year is expected to have “improved”, with trading remaining “robust”, according to Campbell, as house prices continue to benefit from demand inflation.
Just how long prices can continue to rise remains to be seen, with analysts widely predicting they could fall as early as the second half of the year.
Yet the stock market often overestimates the impact of rising mortgage rates and has overly cautiously priced in a drop in house prices, according to Liberum.
“We strongly believe that the stock market is discounting a hard landing for the housing market,” Campbell said, adding that despite rising mortgage rates, “it is still (just) cheaper to buy than to rent”.
A limited housing supply, combined with household savings made during the pandemic and widely available mortgages all suggest the housing market will keep chugging along.
Even if revenue drops at individual homebuilders this year, their land remains a valuable asset, with acres bought several years ago now estimated to be up to 20% undervalued in the bank’s view.
Liberum said it based its latest estimates for 2023 on cost rises of 1% next year, forecasting an upside in compound annual growth of over 45% across most homebuilding stocks.
It recommends buying shares in a swathe of homebuilders, including Barratt, Bellway, Berkeley, Crest Nicholson, MJ Gleeson (LSE:GLE), Persimmon, Redrow, Taylor Wimpey, and Vistry.
The broker’s primary stock picks are Persimmon, MJ Gleeson (LSE:GLE) and Vistry, it said.
Persimmon has guided for sales growth of between 4% and 7% in 2022.
Barratt was guiding for a 12% uptick in sales in the January to May period and expected to end the year with up to £1.1 bn in cash.
Liberum predicts its revenue could rise to £5.26bn up from £4.81bn in the previous equivalent trading period.