Investing.com -- Analysts at RBC (TSX:RY) Capital Markets in a note dated Monday have provided updated ratings of five key players in the UK housebuilding sector as part of its 2025 UK Housebuilder preview.
The analysts reflect on a broad spectrum of adjustments, market challenges, and changes in valuations for these companies: Crest Nicholson (LON:CRST), Gleeson (LON:GLEG), Barratt and Redrow (LON:RDW), Vistry (LON:VTYV), and Persimmon (LON:PSN).
Crest Nicholson has been upgraded to "sector perform" from "underperform," signaling a positive shift in its outlook.
The company has made progress in addressing legacy issues, particularly with its problem sites, as evidenced by its November trading update, which showed no new provisions for these sites.
Crest is now focusing on lower-risk traditional housebuilding, which positions it for more stable growth.
Under CEO Martyn Clark’s leadership, the company is pivoting towards bulk sales and optimizing its landbank, while maintaining a cautious approach to first-time buyers.
RBC analysts are optimistic about the company’s recovery, but they stress that consistent operational improvements and margin enhancements are crucial for justifying a more positive outlook.
The price target has been modestly raised to 210p, with key events such as full-year results and the capital markets day serving as potential catalysts.
RBC has downgraded Gleeson to "sector perform" from "outperform," with the price target unchanged at 650p.
The company continues to focus on affordable housing, addressing the needs of first-time buyers and aligning with government housing priorities.
However, its ambitious target to increase volumes from 1,772 in FY2024 to 3,000 has been overshadowed by stronger growth among competitors in the sector.
This has diminished its relative appeal for growth investors.
One potential growth driver for Gleeson is its land promotion business, Gleeson Land, which could benefit from proposed changes to the National Planning Policy Framework. However, the company’s growth prospects are now more aligned with sector averages rather than the aggressive trajectory it had previously targeted.
Barratt, following its merger with Redrow, has been upgraded to "outperform" from "sector perform," with the price target remaining at 575p.
The merger, which received approval from the Competition and Markets Authority, positions the combined entity for growth in 2025.
Analysts are optimistic about the integration process and expect volume growth and operational delivery, despite challenges in aligning the two companies.
The combined landbank and operational synergies provide Barratt with a strong foundation for growth, and analysts believe that the market has overly focused on mortgage rate concerns, while underestimating the positive impacts of planning reforms.
The current discount to book value offers an opportunity for early share price gains as Barratt reaps the benefits of its strategic alignment.
Vistry has been downgraded to "underperform" from "sector perform," with the price target reduced to 500p from 825p.
The downgrade follows two consecutive profit warnings in October and November 2024, raising concerns about the company’s operational and financial stability.
These warnings, coupled with a lack of transparency in external reports, have raised investor doubts.
Vistry’s partnership business, characterized by fixed-price contracts and lower margins, faces additional pressure from financing constraints among Registered Providers, compounded by rising costs and fire safety remediation.
RBC analysts are concerned about the company’s ability to meet its growth expectations in the current environment, leading to a lower price target.
The full-year trading update in January 2025 will be closely watched for further clarity on the company’s operational challenges.
Persimmon has been downgraded to "underperform" from "sector perform," with the price target reduced to 1,275p from 1,475p, with analysts expecting a full-year operating margin in line with FY2023 at 13.0%.
While the company’s focus on quality and customer service is commendable, analysts believe these improvements may come at a cost, and Persimmon’s previous sector-leading returns may be difficult to maintain in the future.
RBC analysts note that Persimmon’s narrative on build cost inflation differs from its peers, with the company highlighting the significant impact of direct costs and supply chain disruptions.
Additionally, the company appeared unprepared for the adoption of new building regulations, raising concerns that its landbank’s embedded margin may be lower than previously reported.
These factors could lead to downward pressure on the company’s share price when FY2024 results are released.
Despite these concerns, analysts say that Persimmon’s strategy of vertical integration, including its ownership of brickworks, tile works, and other manufacturing assets, may help lift margins in the long term.