Phoenix Raises Stake in Barratt, Bellway After Brexit

By Olga Cotaga

LONDON--Phoenix Asset Management Partners has bought more stock in Barratt Developments PLC (BDEV.LN) and Bellway PLC (BWY.LN) after shares in U.K. house-builders plunged in the wake of the country's vote to leave the European Union.

Since the close of markets June 22, the day before the U.K.'s referendum on EU membership, shares of Barratt and Bellway shed 34% and 30%, respectively.

"The [share] prince was a good opportunity," said Tristan Chapple, head of research at Phoenix Asset Management Partners. "Nothing has changed in [house-building] fundamentals," Mr. Chapple said, adding that he thinks the builders are worth three times as much as their current market value.

Phoenix Asset Management invests in Barratt and Bellway through Phoenix U.K. Fund, which has under management more than 500 million pounds ($657.9 million). After the referendum vote, the fund increased its shareholding in Barratt to 12% from 11.2% previously. It did the same with Bellway, rising its interest in the company to 10.5% from 7.1%. The fund also owns shares in Sports Direct International PLC (SPD.LN) and Tesco PLC (TSCO.LN).

Seven companies last week suspended trading in their property funds after a number of investors had asked to pull their money out. Standard Life Investments was the first to halt trading in its GBP2.9 billion commercial real-estate fund, citing "exceptional market circumstances." The funds buy commercial real-estate properties and invest in real-estate investment trust shares.

Mr. Chapple said his investors hadn't asked for any redemptions since the EU referendum result.

Phoenix Asset Management said that even if the current uncertainty leads to house price deflation, directly affecting profits, land prices would fall as well, making houses cheaper to build in the future. With smaller costs, profits could return to previous levels, the manager said.

Phoenix Asset Management is among the top 10 shareholders in both Barratt and Bellway, Mr. Chapple said, adding that the asset manager has been following the U.K. house-building sector for 18 years. On its website, the asset manager describes itself as a "long-term value investor," which is patient and waits "for opportunities to buy shares at attractive prices."

Canaccord Genuity said the house-building industry "is in very good shape" to react to any potential slowdown caused by Brexit. "Given recent land-buying behavior, we believe that the sector could withstand a house price correction of up to 10% without seeing material asset write-downs," the broker said.

But Canaccord analysts predicted that weaker consumer confidence would impact house-builders' profits in fiscal 2017 and 2018. Fiscal 2016 earnings remain protected by forward order books, they said. The broker predicted house-building volumes falling by 4% to 5% in fiscal 2017 and 2018. It also lowered earnings forecasts by 7% for 2017 and 12% for 2018. Dividend expectations were kept the same.

Canaccord said it preferred companies with stronger balance sheets and identified Persimmon PLC (PSN.LN), Bellway and Taylor Wimpey (TW.LN) as favorites, recommending to buy their stock.

Jefferies said it "remained bullish on the longer term fundamentals" of the sector and that it wasn't changing its estimates. But it did cut share price targets for the industry on average by 25%. It had a "Buy" rating on Taylor Wimpey and Bovis Homes Group PLC (BVS.LN).

Liberum Capital cut earnings-per-share estimates for the sector by around 18%, having reevaluated its figures in the wake of the country's vote to leave the EU. It also cut target share prices by around 20%.

Still, the broker said "valuations now look compelling across the board." Liberum warned that the sector is "for the brave," but encouraged investors to buy shares in Bellway, Berkeley and MJ Gleeson (GLE.LN).

Directors of U.K. house-builders have bought shares in their companies since the EU referendum, a move usually seen as a sign of endorsement. Their investment amounted to a total of GBP1.8 million. This "speaks volumes for management's view of the level of the share price," Liberum said.

After the U.K. voted to leave the EU, Barratt said it expected a period of uncertainty as the country negotiates its exit, adding that it remains confident its business "can respond to the changing landscape."

Write to Olga Cotaga at [e-mail], Twitter @OlgaCotaga

(END) Dow Jones Newswires

July 11, 2016 09:03 ET (13:03 GMT)

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