Housebuilders endured a torrid 2018, so their recent resurgence will have no doubt been welcomed by their big backers in the City.
The sector is up 14% in the first few weeks of 2019, having lost more than a quarter of its value throughout last year, as fears of a ‘no-deal’ Brexit have eased somewhat, and Berenberg thinks there is still plenty of upside left.
“Despite the re-rating, the sector continues to trade on multiples not seen since 2013 and is pricing in significant negative earnings revisions,” said analysts in a note to clients on Monday.
“Our sensitivity analysis suggests that the housebuilders are pricing in volume declines of c10% and price falls of 5% over the next three years. In our view, the fundamentals do not support this outlook and we believe [housebuilders] should re-rate as earnings expectations are met.”
“Despite what current valuations are implying, fundamentals for new-build remain positive. Mortgage lending remains stable, prices are growing in line with wages and affordability remains high.”
Berenberg point to low interest rates and the popularity of the Help to Buy scheme, which it said is “filling the deposit gap” for many prospective buyers and helping to prop up the new-build market.
“With HTB in place until at least 2023, visibility on housebuilders’ cash flows remains high and the sector continues to screen attractively, with c25% of market cap expected to be returned to shareholders over the next three years, in our view.”
It reckons Barratt shares are worth 650p (down from 670p), Bellway’s 3,620p (from 3,780p) and TW’s 210p.