Credit Suisse upgrades Bellway and Persimmon, downgrades Berkeley

Credit Suisse upgraded Bellway and Persimmon, but downgraded Berkeley as it took a look at UK housebuilders.

The bank, which is broadly neutral on the sector, upped Bellway to ‘outperform’ from ‘neutral’ and lifted the price target to 2,918p from 2,472p, saying the market was significantly undervaluing its sector-leading growth potential.

It said Bellway was its preferred name in the sector.

“We think Bellway offers the strongest growth potential in the sector, and its continued ability to grow volume output should enable it to deliver 23% average earnings per share growth in FY16E-18E.”

Despite this strong growth, CS expects the company to maintain a robust balance sheet, turning net cash positive from full year 2017.

Credit Suisse upgraded Persimmon to ‘neutral’ from ‘underperform’ and upped the price target to 1,696p from 1,383p.

It argued Persimmon can continue to deliver superior operational performance and this warrants a premium valuation.

“However, trading on a FY16E P/TNAV of 2.3x, we believe this performance premium is priced in and thus rate Persimmon as a neutral with our new target price indicating the stock is fully valued.”

The bank downgraded Berkeley – its least preferred name in the space – to ‘underperform’ from ‘neutral’ and cut the price target to 2,372p from 3,101p, pointing to concerns over the inner London market.

“Based on our granular analysis of the London market, we find Berkeley gross margins have a strong negative correlation (c.-70%) with the level of unsold new build stock in London.

“Given the 35% increase in unsold units in 1Q16, we expect the group to come under gross margin pressure and forecast FY16/17 adj. gross margins to fall 230bps YoY to 31.1%, lowering our FY16/17 EPS by 15%.”

Credit Suisse said it was turning more bearish on inner London, where it expects weakening demand to remain a drag for the next 12 to 18 months.

The bank said that beyond its most and least preferred picks, it reckons the UK housebuilding sector is trading at broadly fair valuations.

At 1005 BST, Bellway shares were up 1.4% to 2,487p, Persimmon was down 0.6% to 1,988p and Berkeley was down 3% to 3,026p.