JPMorgan Cazenove downgrades Countryside; Bellway and Redrow top picks

The bank pointed out that UK housebuilders are up around 30% year-to-date, driven by earnings upgrades and improved confidence in the outlook. It still reckons the sector is cheap, on 8.7x 2018E price-to-earnings and yielding around 6%, particularly given that it still sees upside risk to estimates, driven by conservative guidance and better land buying conditions of recent years being reflected in earnings.

JPM added that it sees limited risk from either an interest rate rise or a change to the Help to Buy scheme.

Its current estimates for the housebuilders are around 15% higher than at the start of the year and 6% higher than even its pre-Brexit numbers, driven by slightly better market conditions than expected even back then, better operational performance, and a continued degree of prudence in guidance.

“We still see scope for these factors to continue driving upgrades. Much of this year’s performance is about regaining last year’s underperformance. Since the start of 2016, stocks have still slightly underperformed the FTSE 250.”

Its top picks in the small cap space are overweight-rated Bellway and Redrow, which are trading at a discount, despite high growth and positive earnings momentum.

The bank remained ‘neutral’ on Bovis and Crest Nicholson, but said it sees upside risk to both, given that Bovis could see further upgrades and Crest looks cheap on any metric, if it gets more comfortable that guidance is achievable.