UK Homebuilders Down, Any Good Opportunities?

Vestry is up over 50% since June’s low despite UK house prices recently falling due to higher rates. While some homebuilders' stocks have performed better than others, who is better positioned to gain?

Cutting Prices Means Cutting Profits

Last month, UK house asking prices , indicating that higher interest rates are weighing on the UK housing market. The end of subsidies to help first-time owners has impacted the market, as reported by Crest Nicholson, which cut its forecast for profit by almost 30% in August. The drop in asking prices is expected to continue to pressure homebuilder profits, as the BOE still has to contend with inflation well above target and could continue raising rates later in the year.

Existing house sales prices the fastest since 2009 (excluding the pandemic), accumulating four consecutive months of drop till August. The drop in sales price comes with a drop in total transactions, with many homebuilders reporting around a 30% reduction in completions in the first half compared to the prior year. This prevents offsetting lower prices with higher completions, or vice versa, a tactic that firms could have used to sustain profits.

Not All News Are That Bad

Given the context, it's not surprising that firms in the sector have to change their processes. One of the recent ones to shift strategy is Vistry, which it would focus entirely on affordable homes. The shift helped the company maintain its profit guidance for the year, aiming to return as much as £1.0B to shareholders over the next three years. With skyrocketing prices, focusing on lower costs might help the company overtake rivals in market share.

However, the jump in the share price following the announcement dented some of the investment appeal in the company, as its dividend yield is below that of several rivals, including Persimmon. At 5.8%, Persimmon a more attractive return to investors than Vistry's 5.1%. While UK homebuilders try to maintain the attention of investors, they are facing another problem: the slow sales rate is eating into their cash reserves. Persimmon saw its cash on hand cut in half in the first six months of the year. That cash is necessary for maintaining dividends and share buybacks and buying up new land to set the company up for when the market returns. While Persimmon held on to a cash balance, Vestry saw its debt its tax reserves as it spent more on expansion. Whether investing now to shift business focus or conserve capital for the rebound will be the best option will likely depend on how interest rates play out in the next year.

Persimmon Resembles Wedge

With Vestly overbought and Persimmon near 2007 lows and resembling a terminal wedge, investors may be offered a better risk-reward in the latter case. Breaking past the second peak of GBX 1240 might do the trick, but chances of confirmation will increase dramatically only when bulls recapture GBX 1520. Until then, lower prices could be seen either way, as a wedge requires three troughs and two peaks. The bottom trendline may act as support, opening up speculation for a drop under the 1k handle with a first stop at the low of GBX 950.

Source: SpreadEx / Persimmon

Key Takeaways

UK house prices have fallen due to higher interest rates, impacting homebuilder profits. Vistry has shifted its focus to affordable homes, maintaining profit guidance and potentially outperforming rivals. However, Persimmon offers a higher dividend yield to investors. Both companies need help with slow sales rates affecting cash reserves. Vistry's debt has exceeded its tax reserves, while Persimmon's cash on hand has been cut in half. These homebuilders' best course of action will depend on future interest rate developments.