Housebuilders can absorb higher raw material costs says broker

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Housebuilders have the pricing power to overcome rising raw material costs suggests Berenberg, which likes Bellway PLC (LON:BWY), Redrow PLC (LON:RDW) and Vistry PLC (LON:VTY).

The broker says that the price hikes are only affecting certain items that are a small part of overall construction cost, for example, timber is only 5% of the direct build cost.

Second, selling price increases should more than offset cost inflation.

” All else equal, a 1-2% increase in selling prices should be sufficient to offset 3% build cost inflation, which is below what the builders are reporting (3-5%) and well below the house price indices (up to 10%).”

Those most sensitive to price inflation according to Berenberg are Crest (low gross margin), Redrow (low gross margin) and MJ Gleeson (low operating margin).

Least sensitive are Persimmon (high gross margin), Berkeley (high gross margin) and Countryside (low exposure to price changes).

Larger builders also have better-organised supply chains and typically enter into long-term contracts with their suppliers and their procurement processes will avoid significant materials shortages.

Overall, underlying fundamentals are solid argues Berenberg:  “The government remains supportive of the new-build industry and the housing market, banks are strong and willing to lend, mortgages are cheap and wages are growing”.

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