The share price reaction to yesterday’s news of a “cladding” levy on housebuilders looks overdone, according to Liberum Capital Markets.
The broker reckons that a GBP2bn industry levy to offset the GBP3.5bn cost of a scheme designed to remove combustible cladding used by corner-cutting housebuilders could cost builders around 1.5% to 3.0% of their profits over the ten-year life of the scheme.
The government will fund the cost of replacing unsafe cladding for all leaseholders in residential buildings that are at least 18 metres high in England but it hopes to raise much of the money to do so by imposing a new levy and tax on developers.
Lower-rise buildings, deemed to be less fatal for occupants should a serious fire break out, will gain new protection from the costs of cladding removal, the government said, through a long-term, low interest, government-backed financing arrangement.
On the same day, the government announced its scheme, Persimmon PLC (LON:PSN), perhaps still best remembered as the company that paid its erstwhile chief executive officer Jeff Fairburn a shares bonus worth around GBP100mln in 2017, said it would set aside GBP75mln against the potential costs of cladding remediation and safety work at 26 high rise buildings.
According to Liberum, that got the market worried that this could set off a round of such provisions from the other housebuilders.
“Persimmon‘s core business is low rise housing, giving it relatively low exposure compared to peers, so it was surprising that it should announce the biggest provision yet,” Liberum said.
“The provision taken by Persimmon is surprisingly large because the group has not only provided for work on buildings that it continues to own, like peers, but it has also provided amounts to remediate buildings which it constructed but which are now owned by others. Management believes it is right to look after leaseholders first and then seek to be reimbursed by owners, material suppliers, contractors and the government on the properties it does not still own. We understand that this stance has not been taken by others,” Liberum said.
As a result, the broker thinks the market may be overdoing the read-across from Persimmon.
Liberum postulated three ways that the targeted GBP2bn could be raised over ten years: a GBP1,000 levy per home developed; a 0.3% levy on industry revenues; a 2.5 percentage point hike in corporation tax for housebuilders.
The broker is not a fan of the GBP1,000 levy as this disproportionately hits those operating at the cheaper end of the market.
“A levy on turnover would be more equitable. Either of these would reduce profits for listed builders by around 1.5% per annum (over the life of the scheme),” Liberum calculated.
As is often the case, housebuilders are doing very well at the moment thanks to the government tilting the field in its favour but even so, their shares have not been stellar performers.
Liberum reckons the GBP2bn levy will be manageable and that share price weakness represents a buying opportunity.