Morgan Stanley double upgrades Persimmon to ‘overweight’

The bank said that after a 28% three-month outperformance, UK housebuilders now trade at a 10-year price-to-earnings premium to the UK market.

"On relative P/B, we sit at the 10 year average," MS said, adding that it wasn’t "in" the rally.

"To turn positive in a still challenging backdrop, we want appealing (more than 20%) near-term scenario upside with earnings underpin."

MS double-upgraded Persimmon to ‘overweight’ from ‘underweight’ and hiked the price target to 1,685p from 1,131p.

It noted that Persimmon's niche is affordable homes on a UK-wide basis, and its underweight thesis was partly based on rising affordability risks.

"As mortgage rates fall, and affordability improves, we think the business presents the best leverage to a volume recovery of the stocks under our coverage," MS said.

"Persimmon has most to play for under a near-term upside scenario. The stock benefits from highest operating leverage (volumes down most in 2023 YoY of the 4 stocks under coverage) and largest potential gross margin recovery based on the gross margin embedded in the land bank. Further, the stock is overexposed to the first-time buyer, hard hit in 2023."

The bank said that its near-term scenario analysis shows Persimmon presents most potential upside versus the current share price. "We also see moderate upside to FY24 consensus estimates, with more meaningful upside to 2025," it said.

In the same note, Morgan Stanley lifted its price target on ‘underweight’ rated Berkeley to 4,516p from 3,920p, while the PT for Taylor Wimpey, rated ‘equalweight’, was upped to 145p from 115p. MS increased its price target for Barratt Developments, also ‘equalweight’, to 576p from 483p.

At 1010 GMT, Persimmon shares were up 2.1% at 1,455p.