The housebuilding sector appears to be getting off lightly with expected contributions to remediation of cladding on high-rise buildings, Liberum reckons.
With Crest Nicholson PLC (LSE:CRST) and Persimmon PLC (LSE:PSN) having signed the Building Safety Pledge today, the broker expects more companies to follow suit before today’s deadline runs out.
“This may lead to the industry paying out around £1bn in the second phase of this saga, but this is around half the amount the stock market appears to have discounted,” Liberum reported.
As for Crest, it thinks the shares now look cheap at 271.2p, down 2.0% on the day. Liberum has a punchy price target of 425p.
“Crest Nicholson was the first to publicly say that it was signing this pledge. As a result, it has said it will need to increase its fire safety provision from £48mln by a further £80-120mln (pre-tax, gross). The widening of the provision is explained by Crest now undertaking to remedy buildings completed as long ago as 30 years,” Liberum explained.
According to the broker’s cash flow model, the provision over three years is management and should not impede the company’s existing growth plans.
“The housebuilders' shares have fallen 24% since Gove’s first letter on 10 January, losing £9.5bn in value. It is hard to disaggregate the weakness in shares from the cladding issue and from the impact of macro-economic uncertainty around inflation.
“We note that Travis Perkins (LSE:TPK)’ shares have fallen around 19% in the period. Using this as a proxy for what housebuilders might have done in the absence of cladding fears, we find that the market might be discounting a hit of around £1.7bn. We think the actual outturn might only be £1.0bn, which would be around £810m after tax, suggesting good upside in the sector - £900mln is around 3% of the current market capitalisation of the housebuilders,” Liberum calculated.
Although it conceded it is not possible to know whether the share price performance is a decent proxy for how the housebuilders might have fared without Gove’s threat hanging over them, Liberum said: “it will reflect the market’s view of the outlook for discretionary incomes”.
“However, it is quite possible that housebuilders could have outperformed Travis in the last few months as the new-build market has remained very strong. This leads us to think that the housebuilders are due at least another 5% rally as the news is digested,” it postulated.