After a tough 2018 for housebuilders, broker Canaccord Genuity believes the sector now represents an attractive value play for investors - assuming Britain avoids a painful post-Brexit housing recession.
Canaccord said that even though builders have suffered margin pressures and a weaker higher-end market in London and the South-East, the sector has generally “defied the macro doomsayers” and continued to deliver strong profits, attractive dividends and net asset growth.
In 2018, share prices of housebuilders such as Bellway(LON: BWY) and Persimmon (LON:PSN) performed very poorly as Brexit related macro fears intensified and the autumn selling season failed to sparkle, particularly at higher price points.
However, the broker said it looks into 2019 with the sector pricing in significant risk and presenting a very attractive potential value opportunity.
“For us, with strong balance sheets, capital discipline, a supportive land market and extension to ‘Help to Buy’, the key issue remains macro. Our crude sensitivity analysis in this note shows that the sector appears to be broadly pricing in a 5% fall in house prices and a 10% fall in volumes and if the actual outcome for 2019, is at or close to current consensus expectations, we would expect a sharp value rally,” Canaccord analysts wrote in a note to clients.
“We have not changed estimates but see downside risk if the continuing political drama spills into next year,” they added.
Canaccord said it prefers exposure to corporate strong balance sheets, good margins, relatively low exposure to the secondary market and higher price points. It highlighted Bellway, MJ Gleeson (LON:GLE) and Persimmon among its top pics in the sector.
It downgraded Crest Nicholson (LON:CRST) and Telford Homes (LON:TEF) as it sees more risk to earnings given their exposure to higher price points. It upgraded Bovis (LON:BVS) as less recovery is now priced into the shares and the dividend yield is attractive.