Yahoo Finance Housebuilders are a mess – but here's one investors should buy (and one they should avoid)
It rather feels as if the roof is caving in on the house builders as warnings of lower reservation rates and higher cancellations pile up, interest rates rise and consumer confidence remains depressed.
This column is happy to stick with Crest Nicholson and Springfield Properties all the same, but we will pull the rip‑cord on Vistry and reiterate Questor’s buy rating for Bellway.
The rot really set in after Barratt Developments issued a trading statement that reported a marked slowdown in reservation rates. Bellway expressed similar sentiments alongside its full‑year results and then Persimmon and Taylor Wimpey added to the gloom as they spoke of sticky input cost inflation, higher cancellations, lower net reservation rates and in the case of the former an increase to the provisions it had set aside to cover the cost of cladding remediation on buildings.
Worst of all, Persimmon announced a dividend cut.
Share prices gyrated in response but in many cases they had already fallen heavily, thanks to the combination of the Government’s cladding remediation regime, rising interest rates and then the chaos in the mortgage market caused by the nation’s brief flirtation with Trussonomics.
Indeed, Taylor Wimpey’s shares rose on the day of its update, albeit helped by the lower‑than‑expected US inflation number, which stoked speculation that central banks would have scope to pause or even about‑turn on their interest rate policies, and switch to cutting from raising, faster than expected.
Markets had sniffed out the bad news well in advance – Persimmon’s share price peaked in April last year. Before the warning of a cut to the expected dividend of 235p per share, the stock had, in theory, been yielding nearly 19pc. That was clearly in “too good to be true” territory, especially when coupled with a single‑digit multiple of forecast earnings.
Sure enough, Persimmon joined an inglorious list of FTSE 100 stocks to have offered a double‑digit yield on paper but failed to deliver. Vodafone, Shell, Centrica and – when they were part of the FTSE 100 – Marks & Spencer, the now‑suspended Evraz and International Distribution Services, or Royal Mail as it was then, were earlier examples.
The outlook for the builders therefore seems black, but the darkest hour often comes before the dawn, so patient, contrarian investors may like to start doing some research into the sector. Even a whiff of a peak in interest rates, and by extension mortgage rates, stirred builders’ share prices last week and analysts have begun to recalibrate earnings and dividend forecasts.
Profit forecasts for Barratt, Bellway, Persimmon and Taylor Wimpey have all fallen by between a quarter and a third in the past month; in the case of Bellway analysts now forecast profits to be lower in the fiscal year to July 2025 than they were in the 12 months to July 2022.
Bellway offers two other things that may work in its favour over the long term. First, it has net cash on its balance sheet. This compares with the £238m net debt it carried into the housing downturn that resulted from the global financial crisis of 2007‑09.
Second, October’s full‑year results declared its net asset value (NAV) per share to be £27.27, so the shares trade at a 24pc discount to that. An old rule of thumb is that builders look cheap when they trade below historic book value and expensive when the multiple of book value nears or exceeds two.
Only Berkeley, bid target Countryside and Persimmon now trade above historic book value. Vistry trades down near 0.6 times NAV, although that is a little deceptive as around a fifth of net assets are goodwill and intangibles, so tangible net asset value is lower.
And while Vistry’s strategy appeals, as outlined here in September, the prospect of adding the complexity of digesting an acquisition while managing a downturn is a little off-putting, so this column will switch its affections to Bellway.
Questor says: buy Bellway, sell Vistry; hold Crest Nicholson and Springfield Properties
Tickers: BWY, VTY, CRST, SPR
Share prices at close: £20.72, 664p, 226p, 93.4p
Russ Mould is investment director at AJ Bell, the stockbroker
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