Davy Research downgrades Barratt Developments, ups Bellway

24th Mar 2014 15:19

Housing stocks should continue to outperform this year given how housebuilders are coming out of a very long period of buying land. However, the UK housebuilding sector has re-rated from mid-2012 levels of around one times´ price-to-tangible-book-value to about two times now. At previous peaks for the sector back in March 1994 and January 2007 that valuation metric hit a ratio of 2.1 and 2.3, respectively. In parallel, most housebuilders are in agreement that the extremely benign land market has ended.Hence, finding value within the group is now more difficult and investors should focus on those companies that have already secured a good supply of land. Against that fundamental backdrop, Bellway should continue to grow significantly over the next two years. Despite that, its shares have underperformed the sector recently and are now almost trading at a record discount of 20% relative to the sector.For that reason, the broker has upped its view on the shares to 'outperform'.Barratt Developments, on the other hand, is now trading at 1.72 times price-to-tangible book-value, for a 14% discount to the sector. Yet, "we feel this discount is justified due to the shorter land supply (4.2 years versus the sector average of 5.6 years)", Davy said. As such, the broker has decided to downgrade Barratt to 'neutral' with a price target of 409p.AB