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Housing stocks aren’t all built the same – our picks from the sector

We take a closer look at two housebuilder shares sitting on strong foundations and the opportunities they could offer.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Last week we discussed the housing sector more broadly, covering topics that have captured recent headlines.

This week, we’ve looked into a couple of specific names we think are sitting on strong foundations and could offer some value.

Our share research team cover lots of the market’s most popular stocks and sectors, including housebuilders, offering free company research and sector insight. Get our Share Insight email delivered weekly to your inbox to stay on top of the market’s developments. 

Investing in individual companies isn’t right for everyone – it’s higher risk than investing in funds as your investment is dependent on the fate of that company. If the company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

This article isn’t personal advice, if you’re not sure if an investment’s right for you, seek advice. All investments and any income they produce can fall as well as rise in value, so you could make a loss.

London calling

Berkeley Group offers something a little different to its more diversified peers. It has a particular focus on rejuvenating brownfield (disused) sites in and around London.

This offers certain attractions, not least of which is the major undersupply of housing across the UK, which is more prominent in the London area. The government’s latest housing-needs assessment showed 94,000 homes were needed a year in London. For the 12 months to June 2021, only 17,000 were built. Berkeley currently delivers around 10% of London’s new homes, which means there’s plenty of room for that to grow.

The second attraction of London is house prices. They’re much higher than the national average. At the half-year mark, Berkeley’s average selling price was £647,000 which along with developing technically challenging sites, helps it deliver one of the highest gross margins in the sector.

Gross margin 2021

Source: Refinitiv, 21/04/22.

Those margins are important, as Berkeley is one of the only housebuilders to see average sales prices fall, despite rising prices across the country. Part of that is down to the mix of properties sold, but we’ve also seen London price rises lag the broader market.

12-month house price change

Source: ONS House Price Index – March 2021.

That’s meant Berkeley hasn’t reaped as many of the benefits of booming prices. But it does offer some defence if the market cools, as performance hasn’t been as reliant on higher prices. Importantly, sales prices remain high enough to offset the 5% build cost inflation the group’s seeing. Forward sales of £2.0bn also suggest the market’s not wavering yet.

Berkeley’s balance sheet is another strength. Despite having just spent north of £400m in cash to gain control of 24 sites previously shared with National Grid, year-end net cash is expected around £250m. If we add expected free cash flow of £126m into the mix, the 5.5% prospective dividend yield looks attractive and affordable. In the medium term, returns over and above the scheduled £281m per year will depend on excess capital being available. Of course, no dividend is ever guaranteed though.

Berkeley has committed to fixing any cladding issues, along with many of its peers. Though, unlike others, we’re still waiting to hear details on what the total cost will be. That’s something that lingers in the background, and will impact performance this year. But it should be a one-off event that shouldn’t dent the longer-term investment case.

All in, Berkeley has an opportunity on its doorstep in the London area with supply well below where it needs to be. In the wake of higher interest rates, buyer affordability is still the biggest concern for demand though.

While we think those able to afford £650,000 homes are less likely to be impacted by rising costs, a sharp downturn in the economy would hurt all housebuilders – Berkeley included.

The possibility of medium-term ups and downs for the sector are reflected in Berkeley’s price to book ratio of 1.6, below its long-term average. That could offer an opportunity for those happy to ride the UK house market ups and downs.



Building the foundations

Ibstock represents a slightly different perspective on the housing sector. The group is a leading manufacturer and supplier of clay and concrete building materials, with its main end market in the residential construction sector.

That’s an enviable place to be, with a hot housing market and developers itching to push on with construction to take advantage.

But Ibstock’s main attraction is that demand for its products isn’t reliant on high house prices, or even a buzzing market, there simply needs to be a supply gap. And there is, a big one in fact.

UK housing supply has fallen well short of government targets for several years. It’s picking up, but there’s plenty of room to grow and Ibstock’s well placed to provide the bricks needed.

Total new build completions in England

Source: Department for Levelling Up, Housing and Communities, March 2022.

Ibstock's 2021 sales of £409m put the group back to where it was before the pandemic. Management used the year to return the balance sheet to a strong position, with net debt reduced by £30m to £39m. That's meant the group can turn its focus back to growth, rather than survival.

Though that growth comes at a cost, capital expenditure is expected to come in at around £120m over the next couple of years. The spend is set to be spread across a few different areas. The first of which involves improving existing factories, with additions like the first net-zero carbon brick manufacturing facility. These benefits should feed into earnings from 2024.

Capital expenditure

Source: Refinitiv, 22/04/22.

The next, and more exciting, area for spend is within the new division, Ibstock Futures. Announced last year, the aim is to focus on fast growing sectors of the construction market.

The first order of business for this new arm is brick slips, a type of lightweight brick facade. When complete, it’ll be the UK’s first brick slip factory, expected to return roughly £10m a year when all's said and done. That represents a near 10% increase on underlying cash profits.

The risk with ramping up spending is if trading takes a turn, it’s hard to turn off the taps. Added to the pressures on cash flow is the recently announced £30m share buyback, and reinstated dividend. Clearly that shows the confidence management has, but it adds pressure.

We’d be remiss to not mention rising costs. It’s a headwind no business seems to be immune to, but one Ibstock’s managing well so far. The group’s strategy of hedging energy costs has paid off and with robust demand in the first quarter, rising costs have been fully absorbed.

Ibstock's valuation is below the long-term average, trading at 11 times expected earnings. We think that could offer opportunity. However, execution risk is high, so be prepared for a bumpy road.



Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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