Pressures intensifying
With trading conditions continuing to deteriorate for the UK
housebuilders, we cut 2008 and 2009F EPS by another 17% and
41%, assuming 15% price deflation. Analysis of NAVs, cash flows
and financial positions drive no change to our cautious sector view.
Key recommendations & forecasts
Price PER P/NAV P/Adj RAV Div yield
Rating Price target Cal 09F FY07/1H08A FY07/1H08A Cal 09F
Barratt Dev Sell 282 p 229 p 9.7x 0.49 1.36 8.9%
Bellway Hold 738 p 680 p 12.7x 0.82 1.12 6.4%
Berkeley Hold 991 p 900 p 10.9x 1.43 2.09 -
Bovis Homes Hold 471 p 450 p 29.3x 0.80 0.94 5.9%
Persimmon Sell 615 p 500 p 13.6x 0.98 1.21 7.1%
Redrow Hold 280 p 250 p 20.4x 0.76 1.16 4.5%
Taylor Wimpey Hold 136 p 128 p 11.2x 0.50 0.95 7.3%
Source: Company data, ABN AMRO forecasts
Trading conditions have worsened sharply in recent weeks
Recent weeks have seen trading conditions weaken further for the UK housebuilders,
with a lack of mortgage availability and deteriorating customer confidence driving
incremental volume and price pressure. With lending criteria stubbornly tight despite
a backdrop of a falling base rate, corporate recapitalisation and central bank
intervention, we now factor in a 15% peak-to-trough house-price deflation with risks
to the downside, in our view.
EPS and DPS forecasts cut, financial positions under scrutiny
An assumption of 15% house-price deflation over two years and considerable volume
weakness in 2008 have led to significant EPS cuts: 17% in FY08F, 41% in FY09F and
47% in FY10F, leaving us 32%, 38% and 49% below Bloomberg consensus,
respectively. In cases of earnings pressure and/or balance-sheet stretch, we have
also reviewed dividend assumptions and estimate sizeable DPS cuts for Barratt,
Bovis, Redrow and Taylor Wimpey over FY08-10. Finally we analyse the key issues
surrounding cash-flow dynamics, and despite an expectation of minimal short-term
sector land spend, we believe Barratt (FY09) and Taylor Wimpey (FY09) are now
likely to breach interest cover covenants, with Redrow also close to the mark.
No change to our cautious sector view - Sell PSN and BDEV
With the current sector P/historical book (0.72x) appearing to render PER (16.1x cal
2009F) ratios less relevant, we have revisited our economic NAV work, which shows
that, in the event land values fall 45% (which looks feasible given the likely direction
of house prices), book multiples could move lower – a view supported by the sector’s
previous trough valuations. DCF landbank build-out analysis also suggests limited
cause for optimism, particularly in the event of further deflation and/or equity
issuance. At the stock-specific level, we maintain a valuation-based Sell rating on
Persimmon. We move Barratt back to Sell (from Hold), given its long land position
(169% of 1H08 tangible NAV) and the likelihood that equity issuance may be required
(up to £900m, in our view) - and upgrade Taylor Wimpey to Hold (from Sell)
following a 34% decline YTD. Our valuation work suggests that sector share prices
are not yet factoring in adequate levels of house-price deflation, so we see little
reason to alter our cautious stance, despite significant recent weakness in
housebuilder share prices.
Produced by: ABN AMRO
Bank NV
www.abnamroresearch.com
Analysts
William Jones
United Kingdom
+44 20 7678 0959
william.jones@uk.abnamro.com
John Messenger
+44 20 7678 0551
john.messenger@uk.abnamro.com
250 Bishopsgate, London, EC2M 4AA, United Kingdom
Important disclosures can be found in the Disclosures Appendix.
Priced intraday on 7 May 2008.
United Kingdom
Thursday 8 May 2008 Change of forecast
Home Construction

Contents
H O M E C O N S T R U C T I O N 8 M A Y 2 0 0 8 2
I N V E S T M E N T V I E W
Cautious sector view maintained 3
As we analyse economic NAVs, build-out values, financial positions and past
trough multiples in light of our new assumptions on house prices, we see little
reason to alter our cautious stance on the UK housebuilders.
M A C R O D Y N A M I C S
Trading backdrop deteriorating 5
We have seen a marked deterioration in sector trading conditions in recent weeks.
We assume 15% house-price deflation by end-2009, along with rising volume
pressure. This has led to huge cuts in our EPS/DPS forecasts.
Macro backdrop deteriorating 5
Changes to sector assumptions and forecasts 12
Financial/cash flow positions 16
Financial positions by player 20
V A L U A T I O N C O M M E N T
Valuation – not yet at a trough 24
While a sector share-price decline of 21% in 2008 has begun to factor in
additional weakness, our analysis of economic NAVs, build-out DCFs and previous
trough multiples suggests further downside potential.
1) Economic Net Asset Value 24
2) Landbank DCF build-out 29
C O M P A N Y P R O F I L E S
Barratt Developments 37
Bellway 40
Berkeley Group 43
Bovis Homes 46
Persimmon 49
Redrow 52
Taylor Wimpey 55