Home Construction
Another difficult year in store
We expect continued significant trading weakness in 2009, with further house
price falls impacting asset values and cash margins. Valuation calls for
continued caution. We rate BKG, BVS, PSN and RDW at Sell.

Trading likely to deteriorate further; we expect house prices to fall 35%
We expect trading conditions for the UK housebuilders to remain poor in 2009, as sales rates
stay weak and house prices fall further. Mortgage lending conditions – income-multiple
offers, deposit requirements and underlying volume flows – look set to stay restricted, while
demand is likely to be hit by increasingly weak economic conditions and the fear/reality of
rising unemployment. We believe these factors will more than offset the (limited) benefit of a
record low base rate, which we estimate could reach 0.5%. Overall, in light of current
affordability levels and lending conditions, we assume a 35% peak-to-trough decline in house
prices, with further negative implications for asset impairments and cash margins.
Debt positions and cash generation still key
Strategies are now focused on reducing borrowings – net debt of £4.7bn, land creditors of
£2.0bn and committed land spend of £0.7bn are due against tangible net worth of £8.7bn
and market capitalisation of £3.8bn. Debt reduction under revised covenants is likely, in our
opinion, but we think this will depend increasingly on business shrinkage as trough cash
margins, after a 35% house-price fall, wipe out both targeted operating profit and sunk land
costs – leaving WIP reduction as the key lever of cash generation. The latter, and falling
Libor, should aid compliance with covenants, but further price declines could put this at risk.
Valuation not yet at floor, cautious sector view maintained
Our valuation approaches continue to suggest that a cautious view is warranted at current
share prices, even after the weakness of 07/08. This is supported by our economic NAV
methodology, which assumes land values drop 80% peak-to-trough (2.3x gearing vs house
prices) and is also backed by a new accounting NAV approach that forecasts future
writedown requirements and likely subsequent net asset erosion at breakeven profitability.
With the shares now priced largely as equity options, we upgrade TW and Barratt to Hold,
but keep Persimmon and Redrow at Sell and downgrade Bovis and Berkeley (1.7x NAV) to
Sell.

Contents
Further significant trading pressures in 2009 3
We believe a continuation of stringent lending criteria and significant economic
weakness will more than offset the benefit of a likely trough base rate of 0.5%. A
35% peak-to-trough fall in UK house prices is now our central scenario, leading to
further revenue/EPS cuts.
3
Macro backdrop 3
Latest picture on revenue and earnings 14
Debt issues key; cash generation critical 17
Debt issues will remain a key driver of equity performance in 2009, in our view.
Cash generation is critical in the near term for covenant satisfaction and in the
medium term as a means of enabling builders to exploit the trough in land values
when it arrives.
17
Debt analysis – latest picture 17
Cash generation outlook 21
Valuation warrants continued caution 29
Our valuation approaches continue to suggest a cautious sector view is warranted
at current share prices, even after the significant weakness of 2007 and 2008. We
upgrade TW and BDEV to Hold, maintain PSN and RDW at Sell and downgrade
BVS and BKG to Sell.
29
Company profiles
Barratt Developments 42
Bellway 46
Berkeley Group 50
Bovis Homes 54
Persimmon 58
Redrow 62
Taylor Wimpey 66