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Barratt Developments - half year profits up 40%

Charlie Huggins | 24 February 2016 | A A A
Barratt Developments - half year profits up 40%

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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 has delivered a strong first half performance, with completion volumes increasing by 9.4% and total average selling prices up 10.9% to £254,200. This drove a 19.0% rise in revenue to £1,875.5m, and a 40.3% increase in profit before tax to £295.0m. The shares were broadly flat in early morning trading.

Highlights:

  • Gross margin improved by 1.2 percentage points to 18.6% and operating margin improved by 1.9 percentage points to 16.1%.
  • Return on Capital Employed (ROCE) was up by 3.9 percentage points to 25.5%.
  • Net cash of £24.2m at the half year end (31 December 2014: net debt of £134.2m).


Capital returns:

Barratt has announced an interim dividend of 6.0 pence per share (2015: 4.8 pence per share). The group expects to return £678m (67.8 pence per share) of cash through ordinary and special dividends to shareholders over the two years to November 2017.

Current trading and outlook:

The sales performance in the second half to date has been strong, with average net private reservations per active site per week of 0.71 (in line with last year); and total forward sales (including JVs) up 13.4%. The land market continues to provide "excellent opportunities" and the group still expects overall build cost inflation of c. 3% to 4% for FY16.

Our view:

Barratt Developments is enjoying strong volumes and rising selling prices, whilst the forward order book provides good visibility. The group is in excellent shape and is throwing off cash, with plans to pay ordinary and special dividends totalling 30.5p per share in FY16 and 37.3p per share in FY17. This equates to a yield of 5.4% and 6.6%, respectively.

The housing market is being supported by rising disposable incomes, low mortgage rates and government schemes such as Help-to-Buy, which are encouraging more people onto the housing ladder. Changes announced in the Autumn Statement should provide further support. George Osborne plans to invest almost £7 billion on measures to help people, especially first-time-buyers, purchase their own home; including an extension of the Help to Buy programme through to 2021.

Land price inflation is running at modest levels, with the government keen to open up further land for development, in recognition of the UK's chronic housing shortage. This is supporting margins, cash flows and returns of capital to shareholders.

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. For now, market conditions look set to remain favourable, 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.