Media Equity United Kingdom

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1 Bloomberg WSTH<GO> Media Equity United Kingdom 29 th October 2018 House builders in this report: Barratt Developments BDEV.L 5.0bn 489p Bellway BWY.L 3.4bn 2,767p Berkeley Group BKG.L 4.3bn 3,308p Bovis Homes BVS.L 1.3bn 929p Crest Nicholson CRST.L 840m 332p MJ Gleeson GLE.L 365m 668p Persimmon* PSN.L 7.0bn 2,186p Redrow RDW.L 1.9bn 500p Taylor Wimpey TW.L 5.0bn 152p *CAG acts for these companies Crest of a Wave? The next month promises to be important for the UK house builders. The Budget could contain changes to Help to Buy and planning (The Letwin Report is expected today). In addition, four of the larger pure builders will issue trading updates later in November. Ahead of this news flow, the sector has given up all the post-referendum gains and many share prices are now below those of 23rd June The market appears concerned on two levels. First, that the second-hand market has stalled. Secondly, the immunity to this slowdown provided by Help to Buy is finite and its terms could be altered in today s Budget. At this critical point for the sector, Crest Nicholson s recent revised guidance may provide a potentially significant signal. Specifically, that while earnings growth may stall in 2019, cash generation, through active management of land holdings, could improve. There is precedent for this trend. Between 2008 and 2011, the builders managed to cut leverage substantially in the face of a very difficult market. The slowdown of may not be repeated but there are signs that cash generation could improve. Yields may prove to be more important to value than earnings multiples. Sector Averages PER Yield EPS Cover FCF Cover 2017/18 (A) % /19 (F) % /20 (F) % Help to Buy is a focal point for criticism of the new housing market. It is claimed that it has benefited builders more than buyers. The available data is not conclusive. By March 2018, the program had supported the purchase of 169,102 homes at a value of 42.2bn with loans of 8.9bn. First time buyers accounted for 81.0% of purchases but the average price ( 249,708) was higher than the then average for the UK. Help to Buy now accounts for 36.5% of all private new home sales. Recognising this last point, the potential for change in today s Budget has been a factor in recent weak sector share price performance. Our basket of house builders (listed to the left) has experienced an average share price fall of c. 23.0% since January Comparing prices on 23rd June 2016 to current levels, the sector has fallen by an average of 6.0%. Yet forecasts for most pure house builders have remained intact. Excluding Berkeley and Crest Nicholson, the two most London-exposed plays, annualised 2019 EPS growth is still expected to be almost 7.0%. This forecast level, which sits within a very narrow range, will be examined in the light of trading updates from Persimmon, Redrow, Taylor Wimpey and Bovis Homes next month. The most likely outcome from today s Budget is no change to the Help to Buy program. However, there is speculation that, under political pressure, it could be amended to focus exclusively on first-time buyers or put in place a cap on the total annual income of qualifying participants. The Letwin Report, focused on land holdings within the builders, could recommend that land profits be shared with local authorities in addition to other proposals to speed up planning awards and development. Scott Fulton ScottF@capitalaccessgroup.co.uk Oliver Juggins Oliver.Juggins@capitalaccessgroup.co.uk James Hartgill James.Hartgill@capitalaccessgroup.co.uk According to the last reported data from the house builders, the average selling price was 323,790. This compares to recent Halifax and Nationwide data which showed that the current average house price in the UK is c. 220,000. However, ex-berkeley Group and Crest Nicholson, the actual average is 261,730. A focus on first time buyers may be beneficial for the builders in that, absent a home to sell, the time to transact for buyers may reduce. This has implications for WIP and cash flow. The relative strength of balance sheets and the scope for active management of land holdings in a slowing market is likely to be a focus. There is precedent for this situation. Between 2008 and 2011, UK new home completions fell by 44.0%. As a result, house builders earnings collapsed but cash generation improved. Average PBT fell by almost 40.0% in that period but net debt fell by over 90.0%. Using last full year results, the sector has net cash and an average land bank of 7 years on the balance sheet. The scope for builders to under-replace land has implications for dividends/capital returns. At present, the sector yields 5.6% historically, rising to 8.1% one year out. Crest Nicholson s recent comments are instructive. It committed to maintaining its dividend while pointing to a near 20.0% reduction in full year earnings guidance. Confidence in the payment was based on managing land holdings more actively. At the current level, Crest Nicholson yields 10.0% on the full dividend and almost 7.0% on the final alone. This document provides information on UK House Builders - it is not a solicitation of an offer to buy or sell securities. See the disclaimer on the back page.

2 Figure 1: House Builder Share Price Performance 26 th October 2018) YTD Mar 16-Dec 17 Barratt Developments (22.0%) 12.1% Bellway (22.3%) 30.3% Berkeley Group Holdings/The (21.2%) 27.8% Bovis Homes Group (17.5%) 14.5% Crest Nicholson Holdings (39.1%) (6.8%) MJ Gleeson (13.2%) 31.0% Persimmon (20.2%) 30.5% Redrow (23.6%) 53.4% Taylor Wimpey (22.4%) 7.3% AVERAGE (22.4%) +22.2% Figure 2: UK Housing Completions 160, , , ,000 80,000 60,000 40,000 20,000 0 Source: DCLG Figure 3: Average Selling Prices (Last Reported Period) 800, , , , , , , , Capital Access Group

3 Figure 4: Land Bank (in years supply) Average Figure 5: PBT (Adjusted/Final Year End) m Barratt Developments (144.1) (33.0) Bellway Berkeley Group Bovis Homes Persimmon Redrow (44.2) Taylor Wimpey (85.2) (96.1) Average (17.1) Figure 6: Net Debt (excl. Land Creditors) m Barratt Developments 1, , , Bellway NA (59.0) (3.4) 40.6 Berkeley Group (81.0) 4.5 (284.8) (316.9) (42.0) 57.9 Bovis Homes (112.3) (51.7) (50.8) (18.8) Persimmon (41.0) (201.5) Redrow Taylor Wimpey 1, , Average Capital Access Group

4 Figure 7: House Builders Consensus Forecasts EPS DPS Year End 2017/ / / / / /20 Barratt Developments June Bellway July Berkeley Group April Bovis Homes December Crest Nicholson October MJ Gleeson June Persimmon December Redrow June Taylor Wimpey December Figure 8: Dividend Cover and Yield DPS Cover Yield Price 2017/ / / / / /20 Barratt Developments % 9.3% 9.6% Bellway % 5.4% 6.0% Berkeley Group % 6.1% 6.1% Bovis Homes % 11.0% 11.2% Crest Nicholson % 9.7% 10.1% MJ Gleeson % 4.9% 5.2% Persimmon % 10.8% 10.8% Redrow % 6.0% 6.6% Taylor Wimpey % 10.2% 11.8% AVERAGE % 8.1% 8.6% Figure 9: Multiples (Financial Year and Calendar) PER (reported) PER (annualised) Yield (annualised) Price 2017/ / / Barratt Developments % 9.4% Bellway % 5.6% Berkeley Group % 6.1% Bovis Homes % 11.2% Crest Nicholson % 9.8% MJ Gleeson % 5.1% Persimmon % 10.8% Redrow % 6.3% Taylor Wimpey % 11.8% AVERAGE % 8.5% 4 Capital Access Group

5 Figure 10: Balance Sheet KPIs (last reported) Land Creditors WIP Net (Debt)/ Cash Gearing Land Owned Volume Barratt Developments (996.7) (1,463.1) NA 79,432 17,579 5 Bellway (365.4) (1,259.7) 99.0 NA 41,077 10,307 4 Berkeley Group (105.2) (3,239.9) NA 46,867 3, Bovis Homes (311.6) (301.4) (7.6) 0.8% 19,341 1, Crest Nicholson (223.2) (1,206.1) (180.4) 9.5% 16,983 2,935 6 MJ Gleeson (160.5) NA 41.3 NA 12,852 1, Persimmon (611.4) (749.6) 1,154.6 NA 101,445 16,043 6 Redrow (387.0) (779.0) 63.0 NA 27,630 5,718 5 Taylor Wimpey (668.1) (1,537.8) NA 75,617 14,387 5 Years Supply Figure 11: Consensus Forecast EPS Ranges (Next Reported Year) Year Adjusted EPS Number of End Low High Mean % Gap Forecasts Barratt Developments Jun % 16 Bellway Jul % 16 Berkeley Group Apr % 14 Bovis Homes Dec % 14 Crest Nicholson Oct % 10 MJ Gleeson Jun % 6 Persimmon Dec % 16 Redrow Jun % 15 Taylor Wimpey Dec % 16 AVERAGE 13.6% 14 Figure 12: Consensus Forecast DPS Ranges (Next Reported Year) Year DPS Number of End Low High Mean % Gap Forecasts Barratt Developments Jun % 13 Bellway Jul % 12 Berkeley Group Apr % 13 Bovis Homes Dec % 12 Crest Nicholson Oct % 8 MJ Gleeson Jun % 6 Persimmon Dec % 13 Redrow Jun % 9 Taylor Wimpey Dec % 12 AVERAGE 11.3% 11 5 Capital Access Group

6 Figure 13: House Builders Financial Calendar Year End Next Announcement Date Persimmon Dec-18 Trading Update 07/11/2018 Redrow Jun-19 AGM 07/11/2018 Taylor Wimpey Dec-18 Trading Update 13/11/2018 Bovis Homes Dec-18 Trading Update 15/11/2018 Berkeley Group Apr-19 Interim Results 01/12/2018 MJ Gleeson Jun-19 AGM 06/12/2018 Bellway Jul-19 AGM 12/12/2018 Crest Nicholson Oct-18 Final Results 01/01/2019 Barratt Developments Jun-19 Interim Results 06/02/ Capital Access Group

7 This document is a marketing communication which is designed to educate and inform professional investors about the subject Group. The subject Group pays Capital Access Group a fixed annual fee to cover the costs of research production and distribution, and the research has not been prepared in accordance with regulatory requirements designed to promote the independence of investment research. Capital Access Group does not make recommendations. Any comments in this report regarding the valuation of a financial security are based on comparisons with similar securities; they are not forecasts of a likely share price. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell, the securities mentioned. Capital Access Group does not buy or sell shares, nor does it conduct corporate finance transactions, nor does it undertake investment business either in the UK or elsewhere. Capital Access Group is not regulated by the Financial Conduct Authority (FCA). Neither Capital Access Group nor the analyst responsible for this research owns shares or other securities issued by the Group analysed in this research note, nor do they have a position in any derivative contract based on those securities. This research is provided for the use of the professional investment community, market counterparties and sophisticated and high net worth investors as defined in the rules of the regulatory bodies. It is not intended for retail investors. Any such individual who comes into possession of this research should consult an authorised professional adviser. The information contained in this document has been compiled from sources believed to be reliable, but no guarantee whatsoever is given that the information is complete or accurate, or that it is fit for a particular purpose. This document was issued by Capital Access Group without legal responsibility, and is subject to change or withdrawal without notice. By reading this document, you confirm that you have read and understand the above, and that you shall not hold Capital Access Group or any of its members and connected companies liable for any loss that you may sustain should you decide to buy or sell any of the mentioned securities." Capital Access Group Skylight City Tower 50 Basinghall Street EC2V 5DE