Top house builders UK: outlook for 2018

House building companies in the UK had a great performance in 2017; we speak to Liberum analyst, Charlie Campbell, to see if this trend can continue in 2018.

UK’s top house builders

UK house builders outperformed by around 30% in 2017, thanks to first-time buyers, government schemes and the fact that it started from a low level after the Brexit referendum. However, investors are cautious about whether this trend can continue into 2018. Even after an upbeat statement from Taylor Wimpey this month, shares in the stock and its peers were sold off, demonstrating the nervousness towards the sector. Liberum says that it expects continued resilience in the sector, but there are headwinds around slowing house-price growth and higher build costs.

New house builders outperforming

Liberum is most excited by the new house builders, which it says have been outperforming the wider housing market for four key reasons. The first is that they have better exposure to first-time buyers. The second is thanks to the Help to Buy scheme, which is used in around one in three new home purchases. Inventory availability is the third factor, as the second-hand market is undersupplied, and so carrying extra inventory has helped new house builders. The last factor is that new house builders are less exposed to London, where transactions have been weakest in the country.

In this interview, Charlie Campbell, analyst at Liberum, says the government is likely to extend the Help to Buy scheme this year because it has helped to ease the affordable housing supply shortage in the UK. Charlie also says higher interest rates from the Bank of England (BoE) are unlikely to hurt consumers through mortgages, however, it could have an impact on sentiment.

Find out more on why the BoE meetings are important to traders.

Liberum’s best and worst stock picks

In terms of where growth in the sector is likely to come from this year, Liberum says it is looking towards the cheaper growing stocks, which have a great scope for improving returns. The analyst team has buy ratings on Bellway, Galliford Try, MJ Gleeson and Redrow. It has a sell rating on Barratt because of concerns about dividend safety and margin attractiveness.

Bellway is Liberum’s top pick in the sector thanks to its ‘track record of profitable volume growth’ and its attractive valuation. The team sees most upside in Galliford Try on its improvement plans, which could lead to doubling of earnings before interest and tax (EBIT) and at 60% growth in profit before tax (PBT) by 2021. Gleeson is another favourite because it faces limited competition, enjoys leading margins and excellent growth prospects, according to Liberum. The team also thinks Redrow has the foundations to deliver sector-leading volume growth, and margins should be sustained at high levels.

Liberum’s least favorite stock in the UK house builder sector is Barratt. It says that the relatively short landbank and high land creditors means it has less potential to cut cash outflows in support of the dividend than other returners.

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