JP Morgan upgrades estimates on UK housebuilders
By Renae Dyer
Date: Wednesday 07 Dec 2016
(ShareCast News) - JP Morgan Cazenove has upgraded its estimates on UK housebuilders for 2017, saying it sees no signs of a material slowdown.
Sales trends and earnings have held up well despite the initial shock of the Brexit vote sending the sector down 21% in the year to date, the bank said.
"The strength of post Brexit trading to date has left our initial post referendum assumptions looking overly negative, meaning we are now making high single digit upgrades to our estimates for 2017," JP Morgan said.
"Into the new year, we see scope for the sector to outperform, given that we expect the market to remain strong through the key spring selling season and we expect companies to strongly reiterate commitment to the current dividends (the sector currently yields 6%)."
JP Morgan's top picks of the sector are Taylor Wimpey, Persimmons, Crest Nicholson and Bellway as the housebuilders are the" high dividend yield plays and/or stocks that we see continued scope for upgrades".
The bank still expects consumer confidence to fall at some point next year and have a negative impact on housebuilding demand.
However, JP Morgan now sees a 5% decline in volume as more realistic than its previous estimate for a 10% drop.
The bank's analysts believe there is minimal risk to house price deflation outside of London but they are more bearish on the city.
"While we are more bearish on the outlook for London, we see minimal earnings risk to the sector, given that order books tend to be long, companies invested very little in land in recent years, and exposure is increasingly to outer London, benefiting from Help-to-Buy driven demand."
"We continue to believe the sector warrants a higher premium to history, even if the market weakens from here, given that average ROCE (return on capital employed) has improved from a historic average in the mid-teens to 28%."
The improvement on ROCE has been mostly driven by better land buying conditions, JP Morgan added. The bank views this as a "structural change unlikely to reverse, particularly if the market weakens from here".
Meanwhile, JP Morgan believes improved balance sheet efficiency has enabled companies to return a larger proportion of earnings as dividends.
"We view the current 6% average yield for the sector as highly sustainable, even if market conditions deteriorate."
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