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Charlie Campbell, house builders analyst at Liberum, tells IGTV’s Victoria Scholar his sector could see significant upside in a smooth transition to Brexit. His top sector picks include Persimmon and Bellway.
2018 has been a difficult year for the UK house builders. The FTSE 350 Household Goods and Home Construction sector index is down by more than 14% year-to-date, underperforming the FTSE 100 which has shed close to 10%. This marks a sea change from last year when the UK house builders outperformed the wider market by around 30%.
November has seen pressure on the sector accelerate. The house builders along with the banks were among the hardest hit in the fallout from Prime Minister Theresa May’s draft Brexit withdrawal deal. Stocks like Taylor Wimpey and Barrett Developments slumped by more than 7% in a single session following the resignation of several ministers including May’s key Brexit secretary, Dominic Raab. Price action in the sector demonstrates investor concern about ‘the potential impact of consumer confidence collapsing next year’, says Charlie Campbell, housebuilding analyst at Liberum. Houses are ‘ultimately the highest price consumer item out there'. The house builders are trading at the ‘largest discount seen to fair value’ since the global financial crisis (GFC) of 2008. Campbell says this means that ‘in a smooth transition to Brexit or even a reversal of Brexit’, current valuations could ‘offer significant upside.’
UK house prices fell by the most since 2012 in November, with average prices declining by £5222, according to the latest data from Rightmove. London and the South-East saw the sharpest declines, while asking prices also dropped for the first time since 2011. ‘London is still struggling a bit but the further you get from London, the better shape housing is in the UK and there are still quite a few pockets of strength,’ Liberum’s Campbell told IGTV.
For investors looking for dividends in the UK, some of the house builders’ payouts are sharply higher than the benchmark. The 12-month dividend yield on Persimmon is 11.30%, on Taylor Wimpey is 10.52% and on Barratt Development is 9.11%. These compare to the FTSE 100 average of 4.64%. However, with a softening housing market, rising costs and the possibility of higher interest rates from the Bank of England (BoE), how safe are these dividends? ‘A combination of cheaper land and a lower tax rate actually leaves enough space for the dividends, so the dividends are a lot more sustainable’ than they were in the previous cycle argues Liberum’s Campbell.
This sector is ‘fairly risky’ right now given the Brexit uncertainty says Campbell. His top pick in the sector is Persimmon, despite being slightly more expensive than its rivals. He says it has a northern bias and therefore is operating ‘in the parts of the housing market that are strongest’. The company has been doing ‘a really good job’ of reducing the land cost, ‘the dividend is sustainable’ and the ‘balance sheet is very strong.’ Beyond Persimmon, Campbell also likes Bellway and Gleeson in the sector.
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