Barratt Developments has this morning released a trading update covering the year to 30 June 2016, ahead of releasing annual results on 7 September 2016.
The group's key sales metrics are up on last year, however it remains too early for the group to comment on what the impact of the UK's vote to leave the EU will be. The shares fell 2% this morning.
Total completions (including JVs) rose 5.3% to 17,319, with the group's average selling price rising 10.6% to £260,000, helped by a changing sales mix. Net private reservations per active outlet per week increased from 0.64 last year to 0.69, while the group's forward sales remain stable at £1.76bn.
Profit before tax is set to increase in line with expectations to £680m (up 20% year on year).
Return on capital employed (ROCE) increased from 24% to 27%. This increase was aided by the group deferring payment for new land where possible. This also means that although Barratt now has net cash of £590m on the balance sheet (2015: £187m) land creditors represent 38% of the owned land bank (2015: 35%).
Barratt admit that there is greater uncertainty surrounding the sector as a result of the EU vote, and confirm that they have 'contingency plans' in place and have taken action to reduce risk. CEO David Thomas has reaffirmed his belief that the fundamentals of the housing sector and the business remain positive.
The group has said that it intends to stick to its previously announced dividend plan, with the remaining instalments of £125m and £175m scheduled for November 2016 and November 2017 respectively.
Shares in Barratt Development fell sharply in the wake of the UK's decision to leave the European Union. Concerns have centred on the potential impact on the UK's economy, and the knock on effect on the UK's housing market.
If we get a slowdown, it would open up the possibility of a correction in the housing market, and prices falling. Builders' profits and cash flows are highly geared to house prices, so this would not be good news for the sector. Barratt have said that they have plans in place to reduce risk, but it is unlikely that any such plans could fully insulate the group.
That said, the result of the vote won't change every factor affecting the industry, and some supportive factors will remain. Brits still want to own homes, whether in or out of the EU, and government schemes such as help-to-buy will almost certainly be unaffected. The UK still faces a major housing shortage, which should support demand for housing in the long run. Meanwhile, barring a full blown sterling crisis, interest rates look likely to stay lower for longer. This should continue to support mortgage affordability.
The group trades on a forward price to book ratio of 1x, which, despite the recent de-rating, is still above its historic average. The prospective dividend yield of 7.5% is an attraction, but could come under scrutiny should a slowdown hit. A more detailed update on post-Brexit trading conditions can be expected on 7 September 2016.
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 for more information.