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Barratt Developments - strong start to the year

Charles Huggins | 11 November 2015 | A A A
Barratt Developments - strong start to the year

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Barratt Developments plc Ordinary 10p

Sell: 619.40 | Buy: 619.80 | Change 1.20 (0.19%)
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Barratt Developments has released a trading statement covering the 19 week period to 8 November 2015. Market conditions remain strong, with high levels of consumer demand across all regions. The outlook is positive and the group are on track to deliver further good progress in FY16. The shares were broadly flat in early morning trading.

Highlights:

  • Net private reservations per week increased by 12.5%, with a sales rate of 0.70 net private reservations per active site per week.
  • Total forward sales up by 20.7% to £2,499.7m.
  • Overall build costs for FY16 are expected to increase by c. 3-4%, in line with previous guidance.
  • The land market remains attractive - the group are securing "excellent opportunities" that at least meet their minimum hurdle rates.
  • As previously announced, the Board has proposed a record dividend payment of over £200m.


David Thomas, Chief Executive, commented:

"Against the backdrop of a significant structural shortage of new homes in Britain, we have made a strong start to the year... With our disciplined strategy and focus on achieving efficiencies across the business, we are on track to deliver further good progress in FY16. The outlook is positive and we are driving towards our FY17 targets of at least a 20% gross margin and at least a 25% return on capital employed."

Our view:

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.