Liberum upgrades Taylor Wimpey to 'buy', upbeat on sector

Liberum struck an upbeat note on the UK housebuilding sector on Monday, upgrading its stance on shares of Taylor Wimpey as it said recent updates confirmed trading has strengthened in April/May and house price inflation has spread to the new build sector.

The broker upgraded Taylor Wimpey to ‘buy’ from ‘hold’ and lifted the price target to 185p from 180p to reflect the improved outlook.

"It is the sector performance laggard (down 24% since February 2020 against the sector down 13%) and offers a compelling valuation on 1.46x 2021E book given its returns and distributions," Liberum said. "For 2021E we estimate a return on equity (post-tax) of 14% and a 5% dividend yield (rising to 8% in 2022E)."

The shares appear to have underperformed as a result of fire safety cost concerns, which the broker reckons are overdone. "Its £40m cladding provision taken in 2020 and the £125m fire safety provision taken in 2021 equates to around 4% of its 2020 net assets," it noted.

Liberum said buy-rated Persimmon remains its preferred large-cap play in the sector, but it finds value more widely in the smaller housebuilders, which offer more attractive valuations.

"We favour housebuilders with a proven track record of volume growth and prefer northern exposure, low price points and strong balance sheets."

Its top picks are Bellway, MJ Gleeson, Redrow and Vistry, all of which are rated ‘buy’.

"The sector has outperformed and now trades at 1.8x 12m forward P/TNAV, but it remains below its pre-Covid-19 multiple of 2.1x," Liberum said. "Further upgrades should mean the sector trades closer to the pre-Covid-19 valuation."