Housebuilders rally as BoA Merrill says risks priced in, upgrades sector
Housebuilders were the star performers on the FTSE 100 on Friday as Bank of America Merrill Lynch upped its stance on the sector to 'neutral' from 'underperform' and boosted its ratings on several stocks, saying the risks are now priced in.
"Sentiment surrounding Brexit appears to be a strong factor driving the direction of share prices on any given day; a resolution towards a 'soft' Brexit and the shares rise, but if a 'hard' or 'no deal' Brexit looks more likely, the sector underperforms, often quite violently," said the bank.
"It seems at least possible, or even probable, that some sort of Brexit resolution is within sight and therefore the UK housebuilding sector may see some relief."
On the assumption that a 'hard'/'no deal' Brexit is avoided, Merrill bumped up its sector rating.
It double-upgraded "top picks" Persimmon and Taylor Wimpey to 'buy', lifting the target prices to 2,400p from 2,200p and to 175p from 160p, respectively.
Merrill said Persimmon offers investors the highest free cash flow yield in the sector and a combined ‘ordinary’ and ‘special’ dividend stream that yields more than 11%. "Furthermore, the year-end net cash position could be circa £1.3bn, enough to cover its total dividend for two years," it said.
As far as Taylor Wimpey is concerned, it highlighted the highest dividend yield in the sector at over 12%.
"The company ended 2018 with net cash of circa £600m sufficient to cover dividend outflows in 2018 1.2x. On 9 Jan, 19 it published a reassuring trading update covering year end that also contained a forward order book that was up over 9% year-on-year implying good momentum into 2019," it said.
The bank also upgraded Barratt Developments and Bellway to 'neutral' from 'underperform', upping the price targets to 535p from 470p and 3,000p from 2,630p, respectively.
It said Barratt has been trading robustly and is making progress its internal margin improvement targets. On Bellway, it said the balance sheet is unstretched and the land bank is shorter than peers implying relative attractions rest elsewhere.
It maintained its 'underperform' ratings on both Berkeley Group and Bovis Homes on valuation grounds. The bank also left Redrow at 'underperform'. The Bovis target price was slashed to 825p from 1,040p while Berkeley's and Redrow's were unchanged at 3,300p and 500p, respectively.
At 0945 GMT, Persimmon was up 3.4% to 2,182p, Taylor Wimpey was up 3.9% at 154.75p, Barratt was 1.8% higher at 497.80p and Bellway was up 2.1% at 2,792p.