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Barratt Developments - Further progress but London looking weaker

George Salmon | 16 November 2016 | A A A
Barratt Developments - Further progress but London looking weaker

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Barratt Developments plc Ordinary 10p

Sell: 624.60 | Buy: 624.80 | Change -0.60 (-0.10%)
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Further progress but London looking weaker

Trading at Barratt Developments is said to be progressing well, with strong consumer demand supported by good mortgage availability. However, the group remain mindful of the potential for economic uncertainty created by the outcome of the EU referendum. The shares slipped 2% on the news.

The group is set to pay the 12.3p ordinary dividend and full year special dividend of 12.4p on 21 November 2016.

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 months following the vote, shares across the sector have recovered as one by one the housebuilders have released positive updates on post-referendum trading. After initially saying that contingency plans were being readied, Barratt is 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, and the UK's ongoing housing shortage will continue to stoke the fires of demand. Government schemes such as help-to-buy are an added bonus, and are of particular assistance to the builders.

However, it remains early days, 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 slumped in the months after the vote, and national house price growth is moderating.

Perhaps reflecting this uncertainty, the shares offer a high prospective yield of 7.5%, (variable not guaranteed and not an indication of future performance) which could provide an attraction to investors. At present, the group trades on a forward price to book ratio of 1.2x, above its historic average.

Current trading in detail:

Total forward sales (including joint ventures) were up by 4.3% to £2.7bn for the period 1 July to 13 November 2016. The group's sales rate of 0.74 net private reservations per active outlet per average week was marginally up on last year.

Sales in the Northern and Central regions are strongly outperforming 2015, but the London market is softer.

In the period, the group bought £200m of land, on 15 sites. Both of these figures are down from 2015 (£256m on 36 sites) reflecting the group's caution immediately following the EU referendum.

Outlook:

The group is focused on achieving a 20% gross margin in FY17, although the high-end London market presents some headwinds in this regard. Barratt expects to deliver dividends of £1bn in the three years to November 2017. Overall trading remains in-line with market expectations.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.