UK housebuilders boosted by upbeat BoA ML note

Bank of America Merrill Lynch upgraded its stance on Barratt Developments to ‘neutral’ from ‘underperform’ as it took a look at UK housebuilders.

The bank said it remained supportive of the sector and reiterated buy-rated Persimmon, Taylor Wimpey and Bellway as its top picks.

“We believe that housing supply will fail to keep up with long-term demand and that this is likely to result in modest house price inflation that in turn will more than offset cost pressures, allowing margins to expand albeit modestly.

“With wages growing and interest rates benign, affordability is sufficient to maintain growth.”

As far as Barratt is concerned, it said market perception has improved over the last few years, which is likely to continue despite the recent change of management.

Operationally, Barratt is performing well, particularly in the land market where anticipated returns on new developments have resulted in increased internal hurdle rates which bodes well for the direction of future revenues and earnings.

“The three-year dividend plan sets out robust intentions and implies that the stock yields an attractive 5.6% in calendar 2016E,” said ML.

However, it added that the stock trades on a full price-to-earnings ratio currently and has one of the shortest land banks in the sector, which offsets the positives, hence the ‘neutral’ rating.

It lifted its price target on the stock to 655p from 600p.

Merrill downgraded its target price on ‘neutral’ rated Bovis Homes to 1,000p from 1,190p to reflect the cost issues highlighted in the company’s second half trading update.

It said Bovis was suffering from a combination of planning delays on new high margin sites and higher-than-expected labour costs.

At 1125 GMT, BDEV shares were up 2.5% to 607.50p, Persimmon was 1.7% higher at 1,940p, Taylor Wimpey was up 1.1% top 196.20p and Bellway was 2.2% higher at 2,733p.