The bank has an overweight rating on eight of the nine top quoted housebuilders (excluding Berkeley Group) and has raised its target price by 6-17 per cent on all nine stocks.
Construction analyst Jeff Davis said:
Our eight overweight-rated shares assume that cash on return on invested capital (RoIC) will average just 12.3 per cent long term.
We expect far more (15.9 per cent) thanks to greater discipline in a less competitive and a more healthily supplied consented land market, greater strategic land conversion than ever before, and a stronger focus on operational excellence and capital management than in the last cycle.
In addition, we think the smaller listed players offer a strong structural growth opportunity, which is undervalued by their lower-rated share prices.
He added that HSBC’s confident management teams have “learnt from the mistakes made in the last cycle”, where chasing volume came at the detriment of capital management and cash return to shareholders.
We expect a much more balanced approach this cycle, underpinning dividend yields of up to 10.8 per cent by the end of 2017. Our alternative cash returns-based valuation methodology projects up to 51 per cent upside across the sector.
He sets out what he describes as five pillars for picking winners in the sector. These are housebuilders with:
1. The longest short-term landbanks
2. The strongest strategic land operations
3. A greater focus on quality over volume
4.The strongest and most credible commitments to land-buying discipline and capital management
5. The strongest management teams whose LTIPs are best aligned to long-term value creation
HSBC thinks Berkeley, Persimmon, Crest and Taylor Wimpey are best bets when it comes to the above, with Bellway, Crest and Taylor Wimpey shares offering the most compelling value in the sector. Bovis gets a thumbs up when it comes to longer-term horizons, too. Barratt Development, meanwhile, is labelled as having the greatest upside surprise when it comes to RoIC improvement and cash return yield.
Taylor Wimpey has risen 1.5 per cent to 117p; Bellway, which had positive results out today, is up 3.4 per cent to 1,662p; Crest Nicholson shares are flat; Berkeley shares are up 0.8 per cent to 2,627p; Barratt Developments added 2.4 per cent at 9.8p; Persimmon is 1.7 per cent higher at 1,356p; and Galliford Try has edged up 0.4 per cent to 1,312p.