Market Report: Bargain-hunters seek gains in housing

The housebuilder Redrow firmed up last night as traders went hunting for bargains.

The stock was aided by JP Morgan Cazenove, whose analysts said that while first quarter consensus forecasts for the sector have been climbing, rising by more than 30 per cent, share prices have on average lagged behind. Not only is this at odds with recent updates – builders have consistently reported that market conditions are improving – but also with historical valuation metrics.

On JPMorgan's numbers, the sector currently trades at a 7 per cent discount to net asset values (NAV), a sharp contrast to the 22-year average of a 26 per cent premium to book value.

"We believe the decoupling of share prices from underlying market conditions presents both a value gap and buying opportunity in the sector," the broker said, helping Bellway edge up by 2p to 771.5p and Redrow add 1p to 140.1p. "While earnings will be slow to stabilise, NAV provides a copper- bottomed valuation metric which, even in an environment of static house prices... offers significant value today," JPMorgan added, keeping its estimates unchanged.

Traders said the sector may have climbed higher had it not been for an uninspiring house price report from the Nationwide. The muted response was also down to the fact that builders have enjoyed a firm run in recent sessions, as punters piled in on the back of the Chancellor's decision to raise the stamp duty threshold for first-time buyers in the Budget published last week. Some downward pressure was likely this week, they explained, expecting the broker's analysis to gain more traction in coming sessions.

Overall, both the FTSE 100, down 38.34 points at 5672.32, and the FTSE 250, down 17.87 points at 10191.66, were held back despite some positive news on the economic front, with official figures showing that the UK's gross domestic product grew by 0.4 per cent in the final three months of 2009, compared to previous estimates of a 0.3 and 0.1 per cent rise.

Commodity issues were mixed, though traders welcomed the news from BHP Billiton, up 1p at 2268.5p, and Brazil's Vale, who said they will switch to quarterly pricing when supplying iron ore to Japanese steel mills. Annual pricing contracts have proved costly, as miners have faced rising spot prices. With quarterly contracts, they will be able to adjust prices on a shorter horizon, thereby accounting for fluctuations on the spot market.

Elsewhere, water companies were in favour, with United Utilities and Northumbrian Water rising as Credit Suisse weighed in on the prospect of deal activity. The broker said recent news surrounding the potential sale of EDF's UK electricity distribution networks suggested that the process could be fairly competitive, raising the prospect of disappointed bidders scouting for target companies elsewhere in the utilities space.

"A successful bid for EDF's networks would likely demonstrate that financing is available and that LBOs [leveraged buyouts] can work in the post-credit crunch world," the broker said, helping United advance by 5p to 567p and Northumbrian trade up by 11.8p to 286.6p.

"It would indicate that infrastructure funds and sovereign wealth funds still have substantial amounts of cash to invest and highlight that regulated assets with such a low risk/long duration outlook remain relatively rare."

The coal-fired power station operator Drax was slightly lower, easing by 0.9p to 379.9p, following some bearish comment from Barclays Capital. Initiating coverage with an "underweight" stance, the broker said its analysis pointed to a weaker than anticipated outlook for the main driver of Drax's margins.

Unlike consensus, Barclays expects clean dark spreads – sector parlance for the spread between the market price of power and the market prices for the input costs of coal and carbon dioxide emissions – to remain low for up to five years, "suggesting... that Drax's earnings before interest, tax, depreciation and amortisation will experience a 45 per cent fall by 2012".

On the downside, Kingfisher was 4.5p lower at 217.5p, while Home Retail Group lost 2.8p to 271.9p after Nomura expressed a preference for electricals retailers over those in the home improvement sector.

The broker advised going long, or betting on a rising price, on DSG International, down 0.52p at 35.19p, and Kesa Electricals, down 0.3p at 127.3p, while going short, or betting on a falling price, on Kingfisher and Home Retail. "Furniture and DIY data were mixed in February, with a slow start implied to March," Nomura said.

Further afield, Connaught, the services group, fell to 272.6p, down 6.3 per cent or 18.4p, after Charles Stanley switched its stance to "sell" and reduced its 2011 earnings forecasts by 20 per cent. "We placed our recommendation under review post the group's announcement of a £6.8m restructuring plan," the broker said.

"Since then, the chief executive has departed, the shares have fallen sharply, a major contract is under an injunction, the outlook for public spending has deteriorated further, and we have reconsidered our view on the group's amortisation policy."