* The changed current land/house price environment and improved land discipline/strategic land use are creating upward RoIC pressure
* This all seems very much at odds with a sector rating that our EV/ICbased valuation suggests is poised to see a near halving of RoIC; we initiate coverage of ten UK housebuilders, all rated Buy
In our view, share prices are currently discounting a near halving of sector RoIC
We have analysed EV/IC valuation sensitivities for RoIC delivery under various house
price/volume scenarios; we conclude the UK housebuilders sector is already discounting a
reduction in sector average RoIC from our 2016 estimate of 17% to just 9% within the next three
years. Outside of Central London, we do not view house purchaser affordability as stretched, or
land replacement costs as a threat. Hence we think the sector looks significantly undervalued.
The high income yield is attractive.
Uncharted waters on land reinvestment/cashflows call for different thinking
The sector currently trades at an average 1.6x EV/IC and 1.6x P/TNAV on our FY18 estimates.
Our target prices imply averages of 2.0x and 2.2x respectively. We recognise these multiples
are above the sector’s long-term average EV/IC (1.2x) and P/TNAV (1.3x) multiples. However,
given the change in the gearing relationship so far this cycle between UK house and land
prices, the greater use of higher margin strategic land than ever before, and the attractiveness
of the cash pay-outs to investors helped by real financial discipline within the sector, we argue it
should be valued higher. The high income yield is very attractive, but this is not because the
sector has gone ‘ex growth’; far from it. In our view, there are a plethora of real organic growth,
turnaround and self-help opportunities to invest in.