Housebuilder values 'ahead of themselves', Barclays cuts five ratings

Expectations over the outlook for housebuilders "have run ahead of themselves", said Barclays as it downgraded its ratings for Persimmon, Berkeley Group, Redrow, Bellway and Taylor Wimpey.

we re-set all forecasts to reflect the company’s
restructuring (also capturing guidance on special dividends over the next three years),
raise our price target by 15% (2018E and 2019E forecasts rise 9-13%, largely driven by
higher gross margin assumptions) to 957p but stay UW (2018E PTNAV 1.5x vs. ROACE
of c12%). Attractive dividend yield (2018E: 8.5%, including the special).

With pressure to fix the housing supply shortage mounting, the Chancellor is expected to have something "impactful" up his sleeve in the Budget to provide a big boost for the sector, but Barclays suggested investors are over-optimistic about how much of a different it will make.

"We are not signalling that we believe house-building fundamentals have deteriorated. Or that we expect the greater likelihood of rate rises (within sensible parameters) to upset the apple cart," wrote analyst Jon Bell.

"However, very strong share price performance leaves little scope for disappointment and we believe expectations of further government measures could be overblown."

An important survey recently revealed support for the government at its lowest among the young, so as part of the Autumn Budget on 22 November, Bell believes the key tenet of ‘inter-generational fairness’ will be front and centre.

Other changes the government could announce might include changes to Stamp Duty, a further injection into the Help to Buy scheme, or changes to planning laws.

However, while the government's potential moves may appeal to younger buyers, builders face more problems building homes than selling them, with measures to solve the real inhibiting factor of a shortage of skilled labour "less easy" for the government.

The bank's housebuilder equity index is up 46% so far in 2017 versus a 10% gain for the UK-focused FTSE 250 index.

As a result Persimmon and Berkeley were downgraded from 'equal weight' to 'underweight', and Redrow, Bellway and Taylor Wimpey were cut from 'overweight' to 'equal weight'.

Barratt Developments was left on its 'overweight' rating but its price target trimmed to 710p from 712p, while Bovis Homes was kept at 'underweight' but its target was lifted to 957p from 833p.

Barratt, the UK's largest housebuilder by volume, enjoys significant scale benefits and Bell believes an opportunity exists for the company to increase its margins and hence its return on average capital employed, which should lead to a share price re-rating.

Bovis's price target was raised as Bell re-set his forecasts to reflect the company’s restructuring, taking into account higher gross margin expectations and new guidance on special dividends over the next three years.