Jefferies upgrades Taylor Wimpey, downgrades Barratt

Jefferies upgraded Taylor Wimpey to ‘buy’ from ‘hold’ on Monday citing improving risk/reward and downgraded rival Barratt Developments to ‘hold’ from ‘buy’ following a strong share price performance.

"As confidence in the resilience of housing demand grows, we believe investors will continue to focus on the upside potential of forecasts across UK housebuilders," the bank said in a note on the housebuilding sector.

It said buy-rated Persimmon remains its top pick.

"With near-term build rates suggesting upside to FY21 completions, significant further upside in the later years towards capacity, and cost savings and the pull-through from the higher margin land bank supporting sector leading profitability and return on capital employed, we anticipate Persimmon consensus to see continued upward momentum."

Jefferies said the upside potential to EBIT forecasts at Taylor Wimpey appears some of the most pronounced in the sector, with the rights issue funded land purchases offering a pathway of volumes towards group capacity and still meaningful upside to previous/land bank margin levels.

"Execution risk remains key and confidence among investors will need to be regained," it said. "But with growing evidence of the robust market and upgrades at peers, the tide of improving sentiment we believe will once again capture Taylor Wimpey."

As far as Barratt is concerned, it said forecasts now reflect the strong improvement in margin targeted by management and while volume estimates remain short of reaching the group's capacity levels, the scale of this upside potential is now more constrained.

"There continues to be opportunity for net cash estimates for FY22 to prove too conservative and we have upped our special dividend payable Nov 22 to 20p. However while the stock remains inexpensive at 10.5x price-to-earnings, after 20% sector outperformance over the past two years, we anticipate relative momentum to fade."