Top Stock Picks in the UK Housebuilder Sector

Four
Undervalued
Housebuilders

•
Persimmon
(PSN)
•
Bellway
(BWY)
•
Taylor
Wimpey
(TW.)
•
Barratt
Developments
(BDEV)

Homebuilder
share
prices
are
still
not
fully
crediting
the
firming
likelihood
of
a
housing
market
recovery
in
the
nearer
term,
nor
the
longer-term
opportunity
for
homebuilders
in
the
coming
decade.

UK
Housing
Market
–
Reasons
to
Be
Positive

•
The
financial
position
of
UK
households
remains
in
decent
shape
in
2024
• We
expect
the
recent
recovery
in
house
prices
to
continue
• We
expect
a
recovery
in
demand
for
new
housing
from
2025
•
Robust
population
growth
will
stimulate
demand
for
new
houses

Key
Housebuilding
Stocks

Key
Morningstar
Metrics
for
Persimmon

• Fair
Value
Estimate:
£23
• Morningstar
Rating:
4
stars
• Forward
Dividend
Yield:
4.43%
• Economic
Moat:
None

Persimmon
is
our
top
UK
homebuilder
pick,
offering
greatest
upside
amongst
our
coverage
to
the
housing
market’s
inevitable
recovery,
in
our
view.
Trading
on
a
still
depressed
price/book
multiple
of
1.4
times
–
versus
an
average
of
2.3
times
over
the
course
of
the
prior
housing
cycle
–
Persimmon’s
share
price
fails
to
factor
in
the
inevitable
cyclical
earnings
recovery
and
rewarding
decade
ahead
for
the
major
UK
homebuilder.

 Persimmon
was
the
major
UK
homebuilder
most
affected
by
the
soured
UK
housing
market
conditions.
The
late
2022
expiry
of
government
subsidies
to
first-time
homebuyers,
which
constitute
approximately
50%
of
Persimmon’s
sales,
also
contributed
to
Persimmon’s
woes
in
2023.
Still,
we
think
Persimmon
remains
well
positioned
with
an
offering
that
resonates
very
well
within
the
lower-value
niche
it
plays
in.
Long
term,
we
expect
demand
in
the
lower
value
segment
of
the
housing
market
will
remain
robust
given
ongoing
housing
affordability
concerns
and
proposed
housing
policies
of
major
UK
political
parties
which
aim
to
increase
the
supply
of
affordable
homes.

Key
Morningstar
Metrics
for
Taylor
Wimpey

• Fair
Value
Estimate:
190p
• Morningstar
Rating:
4
stars
• Forward
Dividend
Yield:
6.63%
• Economic
Moat:
None

We
keep
our
190p
per
share
fair
value
estimate
and
our
financial
estimates
for
no-moat
Taylor
Wimpey
following
its
April
2024
trading
update.
Homebuyer
demand
in
early
2024
has
retraced
in
part
from
its
cyclical
lows
of
2023.
Still,
a
dramatic
improvement
in
sales
activity
on
Taylor
Wimpey’s
development
sites
has
yet
to
come
to
fruition.

Taylor
Wimpey’s
year-to-date
weekly
private
sales
rate
of
0.69
home
sales
per
active
outlet
is
largely
unchanged
since
the
homebuilder’s
previous
update
in
late
February.
With
little
change
in
demand
conditions
in
early
spring,
we
continue
to
forecast
10,000
private
home
completions
for
Taylor
Wimpey,
at
the
top
end
of
Taylor
Wimpey’s
unchanged
volume
guidance
range
of
9,500–10,000
homes,
and
EBIT
of
£394
million
in
2024.

With
a
cyclical
recovery
still
anticipated
from
2025
onward,
Taylor
Wimpey
continues
to
screen
attractively,
trading
at
a
29%
discount
to
our
fair
value
estimate.

Key
Morningstar
Metrics
for
Bellway

• Fair
Value
Estimate:
£37.50
• Morningstar
Rating:
4
stars
• Forward
Dividend
Yield:
4.33%
• Economic
Moat:
None

Bellway
recently
made
a
bid
for
small
housebuilder
Crest
Nicholson,
which
was
rejected.

Bellway
is
well
positioned
in
the
residential
development
value
chain
to
benefit
from
the
meaningful
barriers
to
entry
posed
by
the
UK’s
complex
and
risky
urban
planning
system.
While
outsourcing
much
of
its
land
preparation
and
construction
activities
to
subcontractors,
Bellway’s
land
acquisition
functions
remain
importantly
in-house.
With
land
acquisition
key
to
shareholder
value
creation,
the
group
is
continuing
its
investment
efforts
in
its
substantial
land
bank,
supporting
long-term
earnings
and
cash
flow
generation.

Bellway’s
land
bank
also
includes
significant
strategic
land
holdings—that
is,
development
land
which
features
complex
and
very
long-dated
planning
approval
processes
while
promising
compensatory
high
gross
margins.
We
expect
Bellway’s
strategic
land
to
offer
continued
gross
margin
support
over
the
coming
decade.

Key
Morningstar
Metrics
for
Berkeley
Group

• Fair
Value
Estimate:
£49
• Morningstar
Rating:
3
stars
• Forward
Dividend
Yield:
1.39%
• Economic
Moat:
None

No-moat
Berkeley
Group
delivered
a
resilient
set
of
fiscal
2024
financial
results,
delivering
£557
million
pretax
profit,
in
line
with
our
expectations.
The
modest
7%
year-on-year
decline
in
pretax
profit
is
pleasing
given
the
significantly
challenged
UK
housing
market
conditions
that
prevailed
in
2023.
Berkeley’s
forward
order
book
remains
strong,
and
with
the
group
already
80%
sold
for
the
coming
year,
it
has
raised
its
fiscal
2025
pretax
profit
guidance
by
5%
to
£525
million.
However,
Berkeley’s
unveiling
of
a
new
division
to
focus
on
affordable
rental
housing
underwhelmed
investors.

Berkeley
has
provided
limited
details
regarding
its
new
affordable
housing
unit,
with
its
longer-term
plans
–
including
the
full
extent
to
which
it
plans
to
scale
up
the
division
–
not
entirely
clear.
Nonetheless,
the
unit
will
engage
in
the
development
of
affordable
housing
and
the
asset
management
of
the
properties
post
their
completion.
For
now,
Berkeley
has
identified
some
4,000
affordable
rental
homes,
known
as
build-to-rent
homes
in
the
UK,
within
its
existing
brownfield
development
projects
for
delivery
over
the
coming
decade.
The
first
completions
in
this
initial
affordable
housing
portfolio
are
expected
in
fiscal
2027.

Key
Morningstar
Metrics
for
Barratt
Developments

• Fair
Value
Estimate:
740p
• Morningstar
Rating:
3
stars
• Forward
Dividend
Yield:
5.85%
• Economic
Moat:
None

We
lifted
our
fair
value
estimate
for
no-moat
Barratt
Developments
by
6%
to
740p
following
the
announcement
of
its
proposed
merger
with
peer
UK
homebuilder
Redrow.
The
deal
offers
strategic
cogency
and
cost
synergy
benefits.
Consequently,
we
fully
expect
the
deal
to
ultimately
proceed,
despite
being
subject
to
approvals
from
Barratt
and
Redrow
shareholders,
as
well
as
UK
antitrust
regulatory
clearance.
The
deal
is
expected
to
be
completed
in
the
second
half
of
2024
calendar
year
after
shareholders
voted
to
approve
it.

We
think
the
merger
offers
strategic
logic,
with
the
combination
set
to
bring
together
two
homebuilders
of
similar
cultures,
which
boast
well-established
reputations
for
excellent
build
quality.
The
merged
entity,
to
be
known
as
Barratt
Redrow
upon
closure
of
the
deal,
will
bring
together
three
strong
brands,
with
Barratt
Homes
active
in
the
first-homebuyer
and
family
market
segment,
while
the
David
Wilson
Homes
and
Redrow
brands
compete
in
the
more
premium
end
of
UK
new
build
housing
markets.

Furthermore,
bringing
together
two
homebuilders’
landbanks
also
offers
benefits
–
particularly
given
the
recent
slowdown
of
the
UK’s
planning
system
building
approval
processes
–
with
Barratt’s
national
footprint
complementing
Redrow’s
presence
in
England
and
Wales.

This
article
has
been
adapted
from
the
quarterly
UK
Homebuilders
Industry
Pulse

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