Why Brexit could make these housebuilders’ shares appealing
The performance of a number of housebuilding shares has been disappointing in 2018. Investors seem to be cautious about their future prospects given the political and economic uncertainty facing the UK. This is not particularly surprising, since house price growth has slowed and Mark Carney has stated that a no-deal Brexit could cause a 35% drop in house prices.
As a result of reduced confidence, a number of housebuilders could offer margins of safety. Although they may prove to be unpopular in the near term, stocks such as Bovis (LON:BVS) and Bellway (LON:BWY) may offer high returns in future years.
Brexit risks
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Since Brexit is an unprecedented event, it is difficult to quantify its impact on the UK economy over the medium term. In the short run, a no-deal Brexit could lead to additional uncertainty for many investors and this has the potential to put further pressure on valuations across the housebuilding sector. Likewise, a deal between the UK and the EU may be insufficient to boost investor confidence in the near term. Investors may await evidence that the UK is delivering improved economic performance before they become more bullish about UK-focused shares.
Brexit opportunity
Despite Brexit risks, housebuilders continue to post relatively robust operational and financial performance. They are generally seeing resilient demand across the vast majority of the UK, with low interest rates and the Help to Buy scheme being notable drivers of the industry.
Interest rates could, of course, move higher over the medium term if the UK’s economic performance improves following Brexit. However, rates are currently forecast to remain at relatively low levels over the next few years. This could help to maintain mortgage availability and affordability. Help to Buy forms a key part of the government’s housing policy, and is likely to result in continued high demand for newbuild properties. Therefore, it could provide a tailwind for housebuilders over the medium term.
Valuations
As mentioned, valuations across the housebuilding sector have come under pressure as the Brexit process has moved ahead during 2018. For instance, Bovis has a P/E ratio, using 2018’s forecast EPS, of 10.4, while Bellway’s P/E ratio is 7.1. Given that Bovis is forecast to post EPS growth of 15% next year, while Bellway’s bottom line is expected to rise 5% this year, the two companies could be trading at discounts to their intrinsic values.
Of course, the two stocks are highly dependent on the performance of the UK economy post-Brexit. Their growth prospects are also closely linked to the pace of increase in interest rates, as well as the continuation of the Help to Buy scheme. But even though there are risks facing both stocks, their valuations appear to factor in the uncertainties they face. Therefore, while Brexit may have contributed to their falling share prices so far this year, it could present an opportunity for long-term investors to buy the stocks at attractive prices.
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