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Barratt Developments - A good start to the year

George Salmon | 15 November 2017 | A A A
Barratt Developments - A good start to the year

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Barratt Developments plc Ordinary 10p

Sell: 602.50 | Buy: 603.00 | Change -18.00 (-2.90%)
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A brief trading update, covering the period 1 July to 12 November 2017, confirms a good start to the year at Barratt Developments.

The shares were little moved on the news.

Our view

Barratt took its foot off the pedal in the immediate aftermath of the EU referendum, slashing spending on new land and readying contingency plans in the event of a crash. It need not have worried. The UK's biggest housebuilder is once again exuding an air of confidence.

Although house price growth has started to slow, and question marks remain over the London market, demand has generally remained strong. Earlier this year, Barratt felt comfortable enough to extend its capital returns plan and offer a more generous ordinary dividend.

There are plenty of factors supporting this decision. While interest rates may creep up, they look set to stay low by historic standards. That should support mortgage affordability, while the UK's ongoing housing shortage continues to stoke the fires of demand for new builds. Supportive government schemes, such as Help to Buy and the Lifetime ISA, remain in place, with a focus on new builds providing an added boost to the builders.

Operationally, performance has been good, and the balance sheet looks in reasonable shape as well. Gross margins have grown from 12.8% in 2012 to 20% last year, and the group is taking measures to improve efficiency in the construction process. This is encouraging to see, but investors should note that land prices and other input costs have been rising recently.

The prospective yield is 6.5%. That level of income is clearly attractive - although investors should bear in mind that these are goldilocks conditions, and housebuilding is a notoriously cyclical industry where things can change quickly.

The shares trade on 1.5 times book value, our preferred valuation method for capital intensive industries like housebuilding. The longer-term average is more like 1.

Trading update

Market conditions remain positive, with high customer demand supported by good availability of attractive mortgage rates.

Total forward sales rose by 8.4% to £2.9bn, driven by increases in the number of affordable and joint venture plots sold. Overall, sales have been agreed on 12,843 plots, 9.5% more than last year.

Reservation rates remained level on the prior year at 0.74 per active site per week. On average, the group was operating from 373 outlets in the period, slightly ahead of last year. Barratt expects outlet numbers to grow modestly over the year.

Looking ahead, the group expects to approve the purchase of more than 20,000 plots in FY18, and targets an owned land bank of around 3.5 years.

Shareholder approval for the final ordinary dividend of 17.1p per share and special dividend of 17.3p is expected to be given today, with the payments due on 20 November.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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