Taylor Wimpey PLC highlighted by Berenberg in underperforming

The underperformance of the housing sector since the start of 2021 offers some buying opportunities, Berenberg argues.

Despite a booming housing market, the sector has underperformed the overall UK market by 22% since the start of 2021, with the government’s recent announcement that it intends to recover a further £4bn from the sector for cladding remediation costs adding to the sector’s woes.

“If this tax is implemented in the same way as the Residential Property Development Tax (RPDT), this would increase the effective tax rate to 37% on an annualised basis,” Berenberg calculates.

The underperformance means that the sector is trading at an average calendar year 2020 free cash flow yield of 8% (or 7% if the cladding tax is implemented). Furthermore, the German bank estimates that the sector has net cash of more than £5bn, representing roughly 16% of the total market capitalisation of the sector.

“Within the sector in 2021, value outperformed (strong negative correlation between price return and valuation measured on a P/TBV [price/tangible book value]) as the cheapest stocks at the start of the year generated the best returns, i.e. Vistry (up 26%, 1.2x P/TBV), Redrow (up 23%, 1.1x P/TBV) and Crest Nicholson (LSE:CRST) (up 14%,1x P/TBV). The worst three performers were CPSC (-4%, 2.4x P/TBV), MJ Gleeson (LSE:GLE) (-3%, 1.7x P/TBV) and BKGH (up 1%, 1.8x P/TBV),” Berenberg summarised.

In its latest research note on the sector, Berenberg singled out Taylor Wimpey PLC (LSE:TW.), which it added to its list of top picks last November when it replaced Bellway on the list.

“Even with the threat of potential further action by the government with regards fire safety, we still think Taylor Wimpey offers a compelling total return over the medium term that is not reflected in the price,” Berenberg said.

Taylor Wimpey currently trades at 150p or thereabouts; Berenberg has just nudged up its price target to 220p from 210p. If the cladding tax is implemented, the target price falls to 200p.

Taylor Wimpey’s 2020 equity raise, which caused around 11% share dilution, was not popular with shareholders but Berenberg said it gave it the chance to enter the market to snap up land before prices started rising.

Berenberg calculates that Taylor Wimpey will end 2021 with around £830mln of cash – it has no borrowings – and the company’s dividend policy is to pay out 7.5% of net assets. If free cash flow is especially good once land payments are made the builder could sanction a special divi or two.