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Upgrades for Barratt and Persimmon as Liberum becomes more constructive on housebuilders

Published: 04:02 13 Apr 2018 EDT

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Fears over rising interest rates and a relatively lacklustre housing market weighed on housebuilder stocks in Q1

There were upgrades for two of the UK’s biggest housebuilders as City broker Liberum turned a bit more bullish on the sector.

Analyst Charlie Campbell moved Barratt Developments PLC (LON:BDEV) up to ‘hold’ from ‘sell’, while he also upgraded Persimmon PLC (LON:PSN) to ‘buy’ from ‘hold’.

Barratt ‘looks cheap’

In a note to clients, he said the upgrades were “in response to falling shares and improving financial metrics”.

“We upgrade Barratt, even as we lower our target price (from 575p to 525p), as the valuation now looks too cheap following recent underperformance and Persimmon, as we raise our target price (to £28.40 from £27.40) to reflect the improving trend in return on equity – putting through a change now that we probably should have made at the time of results.”

More generally, Campbell said he finds himself “a bit more constructive” on the sector given the housebuilders’ underperformance in the opening quarter.

He notes that underperformance in Q1 has historically been a bad omen for the rest of the year, but there has been an exception and he thinks this year could also buck the trend.

A lot of caution already baked in

“The UK housebuilders have only underperformed the UK market in the first quarter on five occasions in the last 25 years,” wrote the analyst.

“In only one of the four instances that it has happened before, in 2000, did the sector then go on to outperform over the year (by 10%), while in the other three instances (2007, 2010 and 2016), the average underperformance was 34%.

“2018 may end up like 2000 if, like in 2000, UK base rates rise more slowly than the stock market fears.”

Campbell added that a lot of caution is already “baked into valuations”, with investors nervous over the potential impact of rising base rates.

Barratt’s share price rose 0.2% to 551.2p in early deals on Friday, while Persimmon was broadly flat at £26.60.

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