| Master Investor Magazine
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Robert Stephens, CFA, discusses why three housebuilders may offer appealing risk/reward ratios ahead of the election.
The operating environment for UK housebuilders has been highly favourable in recent years. For example, FTSE 100 housebuilders Taylor Wimpey (LON:TW), Barratt (LON:BDEV) and Persimmon (LON:PSN) have reported rising earnings per share in each of the past five years.
In spite of this, their share prices have failed to mirror their improving financial performances. A Boris Johnson victory in the upcoming election, however, may change this. The housebuilding sector could benefit from the Conservatives’ focus on demand-side housing policies that mean radical Labour supply-side efforts fail to materialise.
Housing market prospects
Labour’s housing policy, as with much of its manifesto, represents a major change from the status quo. Should they win the election, they plan to build 150,000 social housing units per year. This would be likely to have a significant impact on the housing market, and may mean that demand for private newbuilds falls.
In addition, the Conservatives’ flagship Help to Buy policy would be likely to end under a Labour government. Help to Buy provides a loan of up to 20% of a property’s value, and is aimed at helping first-time buyers to put together a deposit for a new home. Since it is only available on newbuild properties, housebuilders’ financial performance has been catalysed by it over recent years.
Should the Conservatives win the election, Help to Buy would be extended until 2023. Their victory would also mean a less radical wider economic policy, as well as clarity on Brexit, which could provide greater certainty for the UK’s macro outlook. This may produce a more stable monetary policy which makes mortgages more accessible to buyers of newbuild properties.
Investment potential
The short-term prospects for Taylor Wimpey, Barratt and Persimmon are likely to hinge on the outcome of the election. Should Boris Johnson be returned as Prime Minister, their share prices could rise due to investors pricing in operating conditions that have been more similar to those of the past few years than would be the case under a Jeremy Corbyn premiership.
| Master Investor Magazine
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There seems to be significant scope for share price growth among the three FTSE 100 housebuilders. Taylor Wimpey, for instance, has a price-earnings ratio of 8. Its forward dividend yield is currently 10%, while its £392m net cash position suggests that it has the scope to retain its current level of dividend payments over the medium term.
Persimmon’s price-earnings ratio of 9 is arguably representative of the changes it is making to its business model. It has slowed down completions and is investing heavily in customer service to increase its customer satisfaction ratings. Progress has already been reported in this respect, and may produce a more stable financial performance.
Barratt’s price-earnings ratio of 9 could rise substantially if the business can maintain its track record of profitability. Its large land bank, net cash position and five-star HBF (Home Builders Federation) customer satisfaction score suggest that it offers a stable financial outlook if current election polls that predict a Conservative majority prove to be correct.
Those polls may, of course, be wrong. But with low valuations that may reflect the risk of a minority Labour government being returned on 12 December, the three housebuilders could offer long-term investment appeal.