UK homebuilder stocks screen attractively despite their strong share price performance in late 2023.
While share prices no longer factor in the exceedingly downbeat outlook that was held by investors during the nadir of the UK's housing market downturn, the potential for superior risk-adjusted returns remains available to investors.
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: ★★★★
• 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: ★★★★
• 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: ★★★★
• 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: ★★★
• 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: ★★★★
• 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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