JP Morgan Cazenove reckons the market is being over-cautious in its valuations of Britain’s leading house-builders.
And it picks out Taylor Wimpey (LON:TW), Redrow (LON:RDW) and Barratt (LOM:BDEV) as offering particular value at current prices.
The broker admitted the outlook is dour, with housing transactions at running at around half their pre-recession levels. But it also pointed out there is little pressure on house prices and transaction levels.
“In our view, even if current market conditions represent a new normalised level, current sector valuations largely fail to account for medium term recovery in housebuilders' earnings and returns on capital,” JPMC added.
Taylor Wimpey holds the greatest potential, according to JPMC, which has set a price target of 59 pence a share (current price 36.78 pence).
It is rated as ‘overweight’ by the broker as is Barratt and Redrow. It is ‘underweight’ on Berkeley Group (LON:BKG) and Bovis (LON:BVS), and has neutral stance on Bellway (LON:BWY) and Persimmon (LON:PSN).
“We believe that we are unlikely to see a material recovery in mortgage availability and therefore housing market transactions, over the coming year,” JPMC said.
“However, we also see limited downside pressure on either pricing or transaction levels from here. We do not expect an increase in interest rates or continued low levels of consumer confidence to materially impact what is already a depressed market.”