The Swiss bank also selected Berkeley Group Holdings PLC (LON:BKG) and Redrow plc (LON:RDW) as “top picks” in the sector, while seeing the most risky investment being McCarthy & Stone PLC (LON:MCS), recommended as a ‘sell’.
“Despite Brexit fatigue, buoyancy has not returned to the market with most leading indicators staying soft,” analysts said in the note to clients, with the short-term outlook “still looks blurry” amid the political uncertainty.
Most builders covered recently cited continued growth in reservations and order books, despite the weaker backdrop, as fundamentals for the sector remain supportive, including from the government, though “somewhat spoiled” by rising margin pressure from cost inflation.
While stock market pricing point to an immediate decline in return on capital employed (ROCE) — the indication of how well a company is generating profits from its spending — from 26% in 2018 to 26% next year, UBS analysts forecast ROCE will only see a gradual decline to 18% by 2024 when the government’s Help to Buy scheme expires.
They noted the sector’s total shareholder return growing 40% in the year to date and that housebuilders are “well-positioned” against political headwinds, both on the demand and supply sides, with buying intentions remaining firm and mortgage affordability boosted by low interest rates.
Among its ‘buy’ recommendations, the analysts say Redrow is at an “unjustified” 20% discount to peers, Berkeley stands out for its “long-term track record of value creation”, Persimmon for the “overdone concerns” on quality/customer care, while Bellway as a “high-quality mid-cap play”, and Barratt and Taylor Wimpey for their “valuation upside”.
UBS’s biggest hikes to target prices were for Barratt, upped to 720p from 650p, and Bovis, to 1,170p from 1,060p, followed by Berkeley, where the price target was lifted to 5,100p from 4,800p.
On the downside, the target for MCS was trimmed to 125p from 130p.