Persimmon rallies on Jefferies upgrade

Persimmon got a boost on Friday after Jefferies upgraded its stance on shares of the housebuilder to 'buy' from 'hold' and said it was now among its preferred picks in the sector, along with Berkeley and Countryside Properties.

"Against a sector that is +20% year-to-date, individual stock prices have seen a wide variation in performance largely dominated by investor perception of risk," it noted.

"With sector valuations appearing to reflect a circa 12% decline in house prices, we continue to believe risk from Brexit may be overplayed, offering value opportunities in the sector. However, with a changing focus of company specific risk, we see now as the time to modify our stock preference."

In the same note, Jefferies cut its stance on Barratt Developments and Taylor Wimpey to 'hold' from 'buy'.

As far as Persimmon is concerned, it said the strength of the business has long talked for itself, with return on capital employed in excess of 40%, EBIT margin of more than 30% and net cash of £833m.

"Persimmon's dividend yield places it top five in the FTSE 350. While free cash flow dips in 2020E, the strong cash position provides comfort on this yield while still providing scope for 'surplus cash' to supplement in future years.

"With an update on the star rating due at end September, we see the risks from customer service/quality reducing, and believe increasing confidence in the sustainability of sector leading margins should make this stock too cheap to ignore."

On Barratt, Jefferies said the strong share price performance year-to-date, which has seen the stock rise more than 35%, may leave it range-bound in the near term.

"While the stock remains inexpensive at 1.3x cal 2020E NTAV, neither price-to-earnings at 8.3x or dividend yield at 7.3% are standout, and as such we believe the shares may prove more range-bound in the near term," it said.

On Taylor Wimpey, it said: "The dividend yield of 11.7% for FY20 and price-to-earnings of 7.9 suggest the stock is still cheap, but with investors remaining sensitive to risk, we lower the rating to hold."

The bank lifted its price target on Persimmon to 2,438p from 2,196p and cut its price targets on Barratt to 696p from 734p and on Taylor Wimpey to 172p from 208p.

At 1425 BST, Persimmon shares were up 4.2% at 2,153p, while Taylor Wimpey was 0.3% higher at 161p and Barratt was 1.5% firmer at 640.60p.