6th Apr 2022 14:11
(Alliance News) - Cladding remediation bills for UK-listed housebuilders have now hit a combined GBP1.2 billion, but a recent housing boom means firms are well-placed to shoulder the cost.
However, other headwinds are gathering on the horizon after a strong post-pandemic run for the sector.
Redrow PLC and MJ Gleeson PLC on Wednesday became the latest London-listed construction firms to say they have signed a UK government pledge which aims to ensure the safety of high-rise buildings.
The Building Safety Pledge programme was established by the UK government in the wake of the Grenfell Tower fire in 2017 to make sure that residents of high-rise buildings are safe by removing combustible materials, such as cladding. The pledge commits housebuilders to new guidelines for work on potentially unsafe cladding on buildings between 36 feet and 59ft high.
The improvements that Redrow will enact will cost the company an additional provision of GBP164 million, which will be "treated as an exceptional item in the results for the 2022 financial year," Redrow announced. Another, previous provision for fire safety in high rise buildings comes at a cost of GBP36 million, it said.
The additional provision is higher than the amounts reported by Persimmon and Crest Nicholson on Tuesday, citing additional costs of GBP75 million and a range of GBP80 million to GBP120 million respectively.
AJ Bell investment director Russ Mould said that Redrow's additional provision takes the total cost for the "big nine" listed house builders to GBP1.2 billion - and that's before Berkeley quantifies its potential bill, he added.
"Shareholders may not be too perturbed as those nine firms had GBP5.5 billion in net cash on their balance sheets at the last count and analysts expect them to rack up an aggregate operating profit of more than GBP5 billion in their current financial years," said Mould.
Since the lifting of the first lockdown in 2020, the sector has had a bumper run. Recent data from Nationwide showed UK house prices in March saw the strongest annual surge since 2004.
UK house prices rose 14% yearly in March, accelerating from a 13% climb in February.
The average house price stood at GBP265,312 in March 2022 - up 21% from the GBP219,583 recorded in March 2020, the same month the UK went into its first Covid lockdown.
While Redrow's total remediation bill is a chunky GBP200 million, it ended its 2021 financial year with a net cash position of GBP160 million, significantly improved from GBP44 million a year before.
Further, it has made a good start to its new financial year, having reported interim revenue of GBP1.05 billion for the six months to January 2, a record figure and up slightly from GBP1.04 billion year-on-year.
This revenue growth, combined with the operating margin strengthening to 19.5% from 17.1%, helped pretax profit jump 17% to GBP203 million from GBP174 million.
Redrow shares were down 1.1% at 519.50 pence in London on Wednesday, even though "the current cladding remediation bill looks affordable", said AJ Bell's Mould, as he noted a wider lack of relief rally amongst the sector.
"This may reflect wider concerns over rising interest rates, a narrowing of the Help to Buy scheme, the end of the stamp duty tax break, the cladding tax and a possible economic slowdown thanks to higher energy prices in the wake of the Russian invasion of Ukraine," he said.
Persimmon shares were down 0.3% at 2,205p on Wednesday, down 27% over the past 12 months, while Crest Nicholson was down 0.2% and has seen its share price decline 35% over the last year.
The FTSE 350 household good & home construction index - which houses the "big nine" builders - has fallen 25% since the start of the year, placing it amongst the worst performing sectors.
By Lucy Heming; [email protected]
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