LONDON -(Dow Jones)- One of the foundations that underpin the stocks of U.K. house builders may be looking a little shaky - the companies' ability to generate profits.
Shares of U.K. house builders, which, on average, have lost more than a quarter of their value over the past 12 months, took another beating Wednesday following a bleak report from UBS that warned the companies' earnings would face extreme pressure this year and next.
The report cited rapidly deteriorating conditions in the U.K. housing market, including the drop in mortgage lending, house-price deflation and collapsing reservations, which UBS said were down 50% in April and May.
It expects prices to decline by up to 20% and volumes to fall by 30% in the next year as the mortgage famine continues.
"It is hard to see where the quick fix comes to the problems in the mortgage market and, consequently, it is clear to us that this is now a severe problem for profits in both 2008 and 2009," the report said.
Investors seemed to agree.
At 1513 GMT, the shares of five house builders were among the 10 biggest losers in the FTSE 250 index, which was down 0.4%, even though they had recovered from even steeper losses earlier in the day.
Shares of Barratt Developments PLC (LSE:BDEV) (BDEV.LN) traded down 12 pence, or 7.5%, at 145 pence; Taylor Wimpey PLC (LSE:TW) (TW.LN) was down 4 pence, or 5.2%, at 78 pence; Redrow PLC (LSE:RDW) (RDW.LN) was down 11 pence, or 4.9%, at 212 pence; Bovis Homes Group PLC (LSE:BVS) (BVS.LN) was down 21 pence, or 5.1%, at 390 pence; and Bellway PLC (LSE:BWY) (BWY.LN) was down 10 pence, or 1.7%, at 593 pence. FTSE 100-listed Persimmon PLC (LSE:PSN) (PSN.LN) was down 2 pence, or 0.4%, at 458 pence.
UBS downgraded Bellway (LSE:BWY) , Persimmon and Redrow (LSE:RDW) to sell from neutral, and cut the price targets of all the house builders in the FTSE 350 index with the exception of Berkeley Group Holdings PLC (LSE:BKG) (BKG.LN) due to its "unique cash-generation model." Berkeley is predominately focused on the residential market in London and the southeast of England.
An analyst at Shore Capital said Taylor Wimpey and Barratt Developments (LSE:BDEV) are increasingly coming into trouble due to their relatively heavy debt burdens.
Speculation about rights issues is also pulling share prices down, the analyst said, adding that there was still room for house builders' share prices to fall.
UBS said dividend cuts are inevitable. The brokerage has aggressively cut dividend forecasts at Barratt by 50%, Redrow (LSE:RDW) by 42% and Taylor Wimpey by 30%.
Spokesmen for Barratt Developments (LSE:BDEV) , Taylor Wimpey, Redrow (LSE:RDW) , Persimmon and Berkeley declined to comment, while spokesmen for Bovis Homes (LSE:BVS) and Bellway (LSE:BWY) couldn't be reached for comment.
The UBS report said the house builders now are likely to concentrate efforts on cash flow and cost cutting with even more vigor.
That likely will mean more job losses in the industry. Persimmon, the U.K.'s largest house builder by market capitalization, said this week it will make several hundred staff redundant. The company in April shelved plans to develop new sites until conditions improve.
Taylor Wimpey, the U.K.'s second-largest house builder by market cap, last month told staff it would close a third of its 39 branches, making around 600 staff redundant. It has already shed about 40% of its work force in the U.S.
Leslie Kent, analyst at J.M. Finn, said house builders will continue to try to cut costs by integrating regions, squeezing suppliers and slowing building programs.
Kent said that although trading in the short term will be poor, he doesn't anticipate this to impact land values just yet. He said there is value in the house builders' asset base as share prices are at discounts to land values. For instance, Persimmon's net asset value per share at Dec. 31 was 775 pence, 40% above its current share price.
That's hardly cause for optimism, however. The UBS report comes a day after the construction purchasing manager's index showed construction activity in the U.K. fell at the fastest rate since the survey began in 1997.
-By Jonathan Buck, Dow Jones Newswires; +44 (0)207 842 9237; jonathan.buck@ dowjones.com
(END) Dow Jones Newswires 06-04-08 1229 Copyright (c) 2008 Dow Jones & Company, Inc.
