Value stocks don’t accurately reflect the underlying worth of a company. And despite a loss of confidence in the housing market, I think the shares of the UK’s three largest housebuilders are currently in bargain territory.
With interest rates being used as the main weapon in the fight against inflation, mortgages have become increasingly unaffordable. But I think we are coming to the end of the present cycle of rate rises.
However, until there’s greater visibility as to when they will start to come down — and presumably the demand for new houses will pick up again — there will inevitably be a cloud hanging over building stocks.
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Completions
In 2023, Barratt Developments (LSE:BDEV), Taylor Wimpey (LSE:TW.), and Persimmon (LSE:PSN) are expected to build 12,127–15,627 fewer homes than their five-year average.
That’s a potential £5bn reduction in revenue so it’s not surprising their share prices have fallen heavily in recent months.
For no obvious reason, Persimmon appears to be suffering more from the present downturn than the others.
| Completions | Average 2018–2022 | 2023 forecast | Forecast vs. average (%) |
| Barratt Developments | 16,898 | 13,250–14,250 | 78–84 |
| Taylor Wimpey | 13,914 | 9,000–10,500 | 65–75 |
| Persimmon | 15,065 | 8,000–9,000 | 53–60 |
I find this surprising given that the average selling price of its houses (£276k) is the lowest, which is 22% below that of Taylor Wimpey. In a contracting market, I’d expect the cheaper end to be the most resilient.
Assets and liabilities
All three have strong balance sheets. But there’s a disparity between their book values and their present market caps.
| Valuations | Book value at 2022/12/31 (£bn) | Current market cap (£bn) | (Discount)/Premium (%) |
| Barratt Developments | 5.66 | 4.36 | (23) |
| Taylor Wimpey | 4.50 | 4.05 | (10) |
| Persimmon | 3.44 | 3.71 | 8 |
Persimmon is the only one to have net assets higher than its current stock market valuation. This is probably because it tends to return nearly all of its profits to shareholders by way of dividends. The others are usually more conservative, preferring to retain cash.
But it’s impossible to build without land.
Fortunately, none of the three need to buy any soon. Each has approximately five to six years’ supply of plots available. Although, they may be tempted to purchase more with land prices starting to fall.
And excessive debt doesn’t appear to be a problem either.
At 31 December 2022, Barratt had the most borrowings of the three (£202m), followed by Taylor Wimpey (£89m), and Persimmon (£nil).
Returns
With respect to dividends, Persimmon is expected to pay 60p a share in 2023. Its stock is therefore presently yielding around 5%.
But it’s less easy to forecast the others. Barratt is going to review its policy later in the year but, at the moment, aims to pay twice its adjusted earnings per share.
Taylor Wimpey seeks to return around 7.5% of its net assets annually.
Valuations
To try and identify which offers the best value, I’ve estimated what their profits for 2023 might be, based on their average pre-tax profit per house, taken from their latest annual accounts.
| Valuations | Pre-tax profit/house (£) | 2023 forecast completions | 2023 pre-tax profit forecast (£m) | Forecast P/E ratios |
| Barratt Developments | 58,138 | 13,250–14,250 | 770–828 | 5.7–5.3 |
| Taylor Wimpey | 64,144 | 9,000–10,500 | 577–674 | 7.0–6.0 |
| Persimmon | 68,086 | 8,000–9000 | 544–613 | 6.8–6.1 |
On paper, Barratt looks to be the cheapest with the other two more closely matched. Its price-to-earnings ratio (P/E) is currently 5.5.
Even if these figures are reduced by 15% to reflect cost pressures and difficult trading conditions, the P/E ratios would be between seven and eight.
This is well below the current average for the FTSE 100 of 10.
I already own shares in Persimmon so I have enough exposure to the UK housebuilding sector. But if I didn’t, I’d be happy owning any one of them, although Barratt Developments appears to offer the best value at the moment.
