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Barratt Developments - Encouraging trading post-Brexit

George Salmon | 7 September 2016 | A A A
Barratt Developments - Encouraging trading post-Brexit

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Barratt Developments plc Ordinary 10p

Sell: 624.20 | Buy: 624.60 | Change -1.80 (-0.29%)
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Barratt Developments has this morning released results for the year to 30 June 2016. The group's key sales metrics are up on last year, and with the group confirming that trading since the Brexit vote has been encouraging, the shares rose by over 2% this morning.

Revenue has increased by 12.7% to £4,235m while operating margin increased 0.5ppts to 15.8%. Profit before tax has increased in line with expectations to £682m, up 20.7%.

Total completions (including JVs) rose 5.3% to 17,319, with the group's average selling price rising 10.5% to £259,700, helped by a changing sales mix. Net private reservations per active outlet per week increased from 0.64 last year to 0.69, with the figure since 1 July increasing from 0.71 last year to 0.75 this 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 £592m on the balance sheet (2015: £187m) land creditors represent 38% of the £2,880m owned land bank.

CEO David Thomas has reaffirmed his belief that the fundamentals of the housing sector are strong. Although the group will continue to monitor conditions, Barratt are increasingly adopting a 'business-as-usual' stance in the post-Brexit environment.

The group has declared a final ordinary dividend of 12.3p, up 19%, together with a 12.4p special dividend. The total dividend for the year is therefore set to be 30.7p, with Barratt targeting 33.2p next year, in line with the previously announced capital returns plan.

Our view:

Shares in Barratt Developments 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.

However in the weeks following the vote, shares across the sector have recovered as one by one the housebuilders have released positive updates on post-referendum trading.

Barratt's comments with full year results are in stark contrast to those in their trading update released shortly after the vote. After initially saying that contingency plans were being readied, the group are now preparing for 'business-as-usual'. Aside from the top end of the London market, which seems to be slowing, current trading looks solid.

In addition, conditions within the industry are favourable, with several factors supporting Brits' appetite for home ownership. As things stand, low interest rates look like they are here to stay, helping mortgage affordability remain high, while the UK's ongoing housing shortage and government schemes such as help-to-buy continue to stoke the fires of demand.

However, it remains early days yet, and not all the indications we have received post-Brexit have been positive. For example, figures from the Bank of England show that mortgage approvals have fallen to an 18-month low in July.

Perhaps reflecting this uncertainty, the shares offer a high prospective yield of over 6%, which could provide an attraction to investors, especially in the context of today's low interest rates. At present, the group trades on a forward price to book ratio of 1.2x, above its historic average.

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.