Jefferies considers cladding issues, downgrades three UK housebuilders

Jefferies downgraded its recommendation on three UK housebuilders on Monday as it assessed the impact of cladding issues.
The bank downgraded Barratt Developments, Bellway and Berkeley Group to ‘hold’ from ‘buy’.

It said that whether housebuilders should or will shoulder the whole burden of cladding remediation is a “complex and emotive” discussion. Even including a worst-case scenario of 12% tax rate to fund remediation, it still sees value in the sector.

Jefferies’ top picks are buy-rated Persimmon, Crest Nicholson & Redrow. “Despite stepping up tax by a further 8% in FY22, we remain buyers of Persimmon, Taylor Wimpey, Crest Nicholson, Redrow and Vistry,” it said.

“Against the backdrop of what could be a loud campaign from government, share prices could see significant volatility in the coming months. However we still believe there to be opportunity in the sector.”

As far as Barratt, Bellway and Berkeley are concerned, Jefferies said that for those housebuilders who provisioned under the previous scope – i.e. buildings above 18 metres – and/or where they are the ‘responsible person’, it sees risk of further one-off charges and cash outs for cladding remediation, as well as negative PR.

“At this stage we believe even the housebuilders themselves do not know the full extent of the cost (M&A through the period, lack of access, uncertain ‘solutions’, labour constraints, clawback from freeholders) but with approximately 55% of the high rise buildings requiring remediation in London, we believe it is fair to assume the exposure to those with a long history of build in the Capital could be more substantial,” it said.

“Until there is greater understanding of the scale and cost of remedying their own build, our price targets reflect this higher risk profile, and share price performance constrained.”

The bank cut its price target on Barratt to 644p from 851p, while Berkeley’s was reduced to 4,703p from 6,212p. Jefferies cut the price target on Bellway to 3,339p from 4,187p.

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