Full year results from Barratt Developments show further progress being made, as demand for new homes continues to outstrip supply. Revenue grew by 19.1% to £3,759million, profit before tax increased by 44.8% to £565.5m and operating margin improved by 230 basis points to 15.3%. The full year dividend rises by 46.6% to 15.1 pence, which combined with a special dividend of 10 pence, gives a full year pay-out of 25.1p (2014: 10.p). The shares opened more than 2% higher.
- Home completions were up 11% to 16,447, the highest in seven years.
- Private average selling prices increased by 8.7% to £262,500, driven by changes in mix and house price inflation.
- The market for new land remains attractive and build cost inflation was contained to c. 3.5%.
- Return on Capital Employed (ROCE) increased by 440 basis points to 23.9%.
- Strong cash generation resulted in net cash of £186.5m (2014: £73.1m).
The housing market is being supported by rising disposable incomes, low mortgage rates and government schemes such as Help-to-Buy. The first interest rate rise looks to be edging closer, but it is difficult to see rates rising significantly. The Bank of England will be wary of choking off the UK's economic recovery by pushing rates too far, too fast.
Land price inflation is running at modest levels, supporting margins, cash flows and returns of capital to shareholders. The government wants to see 200,000 houses built per year (last year the UK managed just 141,000) and is making more public land available for new homes. This should help prevent land prices running away and underpin house builder's margins. The same cannot be said for labour costs, which are rising due to a shortage of skilled workers. The industry needs to have access to a bigger skilled labour pool before the government's policy can become reality.
With the house building sector trading at significant premium to book value, share prices are likely to be vulnerable if the housing market were to hit a rough patch. But for now, conditions remain favourable, suggesting the house builders' purple patch could last a while longer, especially whilst the Bank of England is at such pains to stress that interest rates will only rise gently over the next few years.
Barratt Development's policy is to pay an ordinary dividend covered three times by earnings, supplemented by special cash payments totalling £400m spread across 2015-17. The total capital return for this year is £250m (2014: £102m), equating to 25.1 pence per share. The group aims to pay a special dividend of £125m in FY16 and £175m in FY17, alongside ordinary dividends.
Current trading and outlook:
The sales performance has been strong for the first 10 weeks of FY16, with net private reservations per week of 257 (FY15: 224), resulting in average net private reservations per active site per week of 0.68 (FY15: 0.62). Total forward sales are up 32.2% and total completions for the coming year are expected to rise to around 16,750 (FY15: 16,447).
David Thomas, Chief Executive, commented:
"The strong operational and financial performance in FY15 reinforces the progress we have made over the past few years. Alongside our industry leading management team, I will continue to execute on our current strategy and focus on driving further efficiencies across the business. The new financial year has started very well; we have a strong forward sales position and are making very good progress towards our FY17 targets of at least a 20% gross margin and at least a 25% return on capital employed."
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