Housebuilder shares in focus as expert predicts relief rally

This City analyst has just slashed profit forecasts for the housebuilding sector but thinks there are bargains to be had.

Financial crisis-era valuations in the housebuilding sector today led City analysts to ask whether the industry’s expected hard landing is now close to being factored in.

Deutsche Bank downgraded its estimates for the major players today but also told clients: “After a brutal sell-off, we believe much is now in the price and a relief rally lies ahead.”

UBS also pointed to the depressed valuation of Bellway (LSE:BWY), which it says is “unfairly treated” at 27% below the wider sector despite a healthy balance sheet and strong record on volumes.

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Bellway’s position after this year’s 46% fall in shares to 1,767p was highlighted by Peel Hunt, which has a “buy’ recommendation and price target of 2,710p.

Responding to annual results by the FTSE 250-listed builder, the broker cut its estimates for 2023 by 11% and 2024’s by 26% as it models lower completions and margin compression.

It added: “The fact that trading has slowed should not surprise anyone. With new buyers likely to sit on their hands until a clearer economic picture appears, we see pressure on sales rates for the foreseeable future.

“Better news comes from the balance sheet and we do not envisage large asset write-downs.”

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At the current price, shares trade on a price/earnings multiple of six times and with a 6.6% dividend yield. UBS has a price target of 2,190p, adding that it sees limited financial risk given the company had £245 million of net cash equivalent to 7% of net assets.

Looking across the wider sector, the Swiss bank thinks the current rate rise cycle will contribute to volumes falling 20% and price by 10% in 2024 compared with 2022 levels.

In new analysis published today, Deutsche Bank revealed major cuts to its price estimates, but it continues to have “buy” recommendations for FTSE 100-listed Barratt Developments (LSE:BDEV) with a target of 462p and for Taylor Wimpey (LSE:TW.) at 115p.

It removed its “buy” stance on Berkeley Group (LSE:BKG) after lowering its price estimate by 31% to 3,807p, while Persimmon (LSE:PSN) is also rated at “hold” after the target was cut 58% to 1,207p.

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Deutsche Bank’s Jon Bell said: “The housing market is in a state of flux - mortgage rates have tripled; loans are less available; future re-financings will be painful.

“We make major cuts to our estimates, now predicated on lower house prices, reduced volumes and stubborn build cost inflation. However, falls of about 50-60% year-to-date leaves share prices at steep discounts to net asset values.”

Bell noted that material write-downs and/or new equity requirements were unlikely but that enterprise value/sales multiples are now at financial crisis levels for many stocks.

Among the FTSE 250-listed builders, Deutsche Bank upgraded Bellway to a “buy” based on a new target price of 2,167p, and also backed Crest Nicholson Holdings (LSE:CRST) and Redrow (LSE:RDW) at 235p and 499p respectively. Vistry Group (LSE:VTY) is a “hold” with target of 710p.