View from City Road: Don't write off the write-offs

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The Independent Online
BRITAIN'S housebuilders spent yesterday praying that the cautious optimism on the housing market expressed by Nationwide and Halifax was not another false dawn. But, while a housing recovery could ease some of this year's pain, it will be too late to do anything for last year's results, which will be horrendous.

For most of the big companies, meagre trading profits will be eliminated by write- offs totalling at least pounds 600m - or almost a sixth of the sector's market capitalisation. By far the largest part of that will come from Tarmac, where property, housing and restructuring provisions are expected to be at least pounds 250m. But NatWest Securities estimates that Costain will provide pounds 150m and Wimpey at least pounds 120m, while Taylor Woodrow and Amec are likely to come in above pounds 50m.

According to Warburg Securities, in 1991 builders wrote pounds 354m off the value of their housing land alone, bringing the total to pounds 800m in four years - more than enough to buy all of Wimpey and Taylor Woodrow. The focus for the 1992 write-offs has switched from housing, which will account for about a third of the provisions, to long- overdue rationalisation and commercial property - virtually ignored last year, despite overwhelming evidence that the market had collapsed.

Investors, despite ample warnings of the impending bad news, have chosen to focus on lower interest rates and the Government's determination to end the recession. The sector has outperformed the market by almost 30 per cent since Black Wednesday.

That ignores the impact the provisions will have on balance sheets. They will slash net assets, pushing gearing up - further worrying already nervous banks - and depleting reserves.

Costain's retained reserves - pounds 85.3m at group level and pounds 50.7m in the company at the end of 1991 - are likely to be wiped out, even if Peter Costain, the chief executive, manages to clinch the sale of the Australian mines. Just as well that the City is not expecting it to pay a final dividend.

It also ignores the fact that any recovery in housing would have to be dramatic to compensate for the accelerating slump in contracting, which is squeezing margins and, because workloads are slipping, causing negative cash flow. The outperformance has come too soon.

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