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Barratt's cladding costs cannot be ignored

The housebuilder has a lot to celebrate, but its fire safety costs could yet increase
July 20, 2022
  • Government policy impossible to predict
  • Sales up to £3.62bn
IC TIP: Hold

Since Barratt Developments (BDEV) revealed last week that it had been slapped with a £412mn cladding bill, market reaction has been mixed. The shares dropped 2 per cent on the morning of the announcement, not helped by the company missing its home completions estimate, but have since risen 6 per cent as part of the wider market rally.

The head-scratcher for Barratt investors is the same for investors in the other big housebuilders: although housing remains in high demand, righting the wrongs of Grenfell is costing housebuilders a lot of money, and the outlook is uncertain. This is reflected in Barratt’s trading update. It forecasts that forward sales have risen to £3.62bn for the year to 30 June compared with £3.47bn last year. The number of completed homes in that year are also up to 17,908, from 17,243 the year before, but this figure is lower than the 18,000 plus it forecast in February. And although the company said it anticipates pre-tax profit for the year to 30 June to drop from £812mn last year to between £638mn and £648mn, that is only after accounting for the cladding bill. Take it away, which Barratt made a point of doing by presenting its “unadjusted figures” in the update, and pre-tax profit is up to between £1,050mn and £1,060mn.

That bill would be welcome news if Barratt could guarantee that this is the last of its additional fire safety costs, but it can't. It says the cost of its ‘building safety unit’ will increase by around £10mn a year starting this year and, like all housebuilders, it may also be lumped with additional cost-bearing fire safety responsibilities from the government. Of course, it is impossible to say for sure because the twists and turns in the government's stance on cladding since Grenfell have been so unpredictable.

This has largely been to do with the rapid turnover in the department for levelling up, housing and communities. The new housing minister is the 12th since 2010 and the new secretary of state for the department is the fifth since 2018. While the incumbent Greg Clark is seen by the housebuilding industry as less confrontational than his predecessor Michael Gove, no one really knows how Clark might proceed – or even whether he’ll still be in the job when a new prime minister is chosen.

Barratt’s underlying business seems strong but, with so many unanswered questions about fire safety and the housing market, it is hard to recommend buying this stock – at least until its results or the housing department provide more clarity. Hold at 483p.

Last IC View: Hold, 621p, 9 Feb 2022