Ummmm. It is difficult to imagine a harsher statement: “Shareholders should cut their losses and no one should consider buying until details of write-downs, gearing and any financial restructuring become clear.”
Those damning words were used in a note from Dresdner to describe house builder Barratt.
You may remember, Barratt was that company which used to feature a man in a helicopter in its TV ads. The trouble, it seems, is that the company failed to take a helicopter view. It bought Wilson Bowden just before the credit crunch first bit, and saw its net debt hit £1.7bn. It also made the mistake of buying land at the peak of the cycle.
It’s funny isn’t it? When things are going well, and some say – they are going too well, a crash will follow – many often turn to insiders for their view. So, if house builders are buying land, things must be fine. Remember that for future reference; the activities of those already operating in a market seem to be of limited relevance in quantifying whether the market has become too exuberant.
Anyway, the Dresdner note said: “With Barratt’s share price falling with seemingly no means of visible support, we have withdrawn our target price (previously 199p) since we cannot gauge the dilution of a financial rescue package – nor indeed the chances of one being supported. Although we would not rule out a financial partner emerging, the risks on the downside weigh against us recommending a buy at any price until there is more financial clarity.
“We believe even at these levels existing shareholders should cut their losses and no one should consider buying until details of write-downs, gearing and any financial restructuring become clear.”
Take a look at the share price; it has fallen from 1,200p in February last year to just 100p. That isn’t merely a crash, it’s more like a complete catastrophe. The last time the share price was so low was in the early 1990s, when the company nearly went bust.
What is really worrying is this. Barratt’s market capitalisation at the time of writing is £312 million. Yet pre-tax profits for 2008 are forecast to hit £400 million. So, either the share price is ridiculously cheap, or, well …, work it out for yourself.
Barratt is not alone in seeing its share price fall. Persimmon fell 9.6 per cent yesterday, and by the way will be beating the Apprentices in tonight’s TV programme when it gets fired first. Today it is being ousted from the FTSE 100.
But, right now, it is Barratt which has really got analysts worried.
A right issue will solve the problem, but, there must surely come a time when rights issue no longer work. With more and more banks asking shareholders to raid their piggy banks and stomp up money, or alternatively going cap in hand to sovereign wealth funds, the danger must be that sooner or later the appetite for funding rights issues will fade.
I am in agreement with your article, no one should touch Barratts. But my view is from the customer
end, as they are scamming extra money from customers, by offering sales inducements (ie money
off) which disappear by magic as completion arrives. The fact that they would do this to first time
buyers, is a big red flag as to how bad their finances must be , and how desperate they now are.