Jefferies reiterates positive stance on UK housebuilders

Jefferies reiterated its positive stance on UK housebuilders on Tuesday, saying it still sees considerable upside potential to share prices from the improving rate environment and government changes to planning.

The bank said that despite a strong share price performance since October last year, its analysis suggests that share prices are now looking through 2025, but are in most part still shy of reflecting FY26 estimates.

"However forecast margins reflecting operational leverage and not any capture price over cost, our analysis suggests only a modest level of house price inflation offers significant further upside potential to share prices: 3% house price inflation for 2 years and build costs reacting in the second year, and our analysis suggests 40-80% upside potential to share prices," it said.

"A potential reset of return on equity in the sector back towards 2019 levels driven by the potential land opportunity the new government's change to planning could create offers a scenario under which share prices could potentially double."

The bank resumed coverage of Bellway at ‘buy’ with a price target of 3,646p and added the stock to its "top picks" list which also includes Taylor Wimpey and Persimmon.

Jefferies said Bellway's significant land buying through 2021-23 and continued investment into work-in-progress puts the group in one of the strongest positions near term to capture volume upside from any recovery in customer demand.

"The group's movement into strategic land through that time positions Bellway well to take advantage of the potential new cycle of land investment which the new government's planning policy we believe will create," it said.

"And if we can dream the dream of previous completion targets, Bellway offers the greatest volume upside, operational leverage and ROCE improvement. Trading at 1.1x 2025 P/NTAV Bellway sits among the cheapest of the UK housebuilders."

Jefferies also resumed coverage of Crest Nicholson at ‘hold’ with a 230p price target.

It said the collapse of the takeover offer from Bellway brings questions that Crest Nicholson management will need to answer "to reassure".

"The largest one-off is likely the credibility of the fire-safety provision & its coverage for buildings where remediation is as yet unknown," it said. "But the longer term investment case requires a strategic (re)positioning of the group by the incoming CEO that shows the pathway and drivers to previous industry average margins & returns."

Jefferies said that trading at a 25% discount to NTAV, it can be argued the downside is more than reflected in the valuation. "But share price momentum will likely require a structural rebuild of investor confidence," it added.

Jefferies reiterated its ‘hold’ rating on Barratt and lifted the price target to 606p from 583p.

"While Barratt is not anticipated to control Redrow until mid October with the deal now closed we have updated our Barratt forecasts to include Redrow," it said.

"Like others in the sector, Barratt Redrow has significant leverage to the improving housing market as well as the meaningful land investment opportunity that we believe the changes in planning bring. And at 1.2x calendar P/ NTAV the group is not expensive.

"But with the risk of hiccups in integration and largest fire safety provision, we see better risk/reward balance elsewhere."