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(Alliance News) - Broker Jefferies on Monday backed the UK housebuilding sector, despite the threat of cladding related-costs.
Jefferies said Persimmon PLC, Crest Nicholson Holdings PLC and Redrow PLC are its "top picks", though the broker cut its recommendation for three housebuilding peers.
The costs of cladding remediation will be "loud" over the coming two to three months, Jefferies said.
"With a potential addition GBP4 billion bill for cladding remediation, the UK Housing Minister last week appeared to ramp up pressure on the building industry as a whole, and in particular the developers, to foot the cost. In the coming months to Easter when he is due to set out more details of his plans, we believe the housing minister will seek to make life as difficult as he can for all involved. Threats of tax, business continuity (in terms of planning approvals, product usage), direct communications to shareholders and a very loud public campaign in the press and parliament to try to influence those involved to voluntarily contribute," the broker explained.
Developers in the UK must agree a GBP4 billion plan to fix dangerous cladding on low-rise flats by early March or risk new laws forcing them to act, Housing Secretary Michael Gove said earlier in January.
The Cabinet minister threatened that he is "prepared to take all steps necessary" to fix the "broken system".
Jefferies added: "With the minimum case that housebuilders remediate their own builds, the breadth of some provisions may have to increase."
That said, the broker added that its top picks remain Persimmon, Crest Nicholson and Redrow. Jefferies is also a buyer of Taylor Wimpey PLC and Vistry Group PLC.
"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," Jefferies added.
Conversely, Jefferies downgraded Barratt Developments PLC, Berkeley Group Holdings PLC and Bellway PLC to Hold.
"For those housebuilders who provisioned under the previous scope (ie buildings above 18 metres) and/or where they are the 'responsible person', we see risk of further one-off charges and cash outs for cladding remediation, as well as negative PR," Jefferies added.
"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. 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."
By Eric Cunha; ericcunha@alliancenews.com
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