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Barratt Developments - London market hangs over the group

Equity research team | 12 January 2017 | A A A
Barratt Developments - London market hangs over the group

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Barratt Developments plc Ordinary 10p

Sell: 619.40 | Buy: 619.80 | Change 1.20 (0.19%)
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Completions in the first six months of Barratt's trading year are down 6% on a year earlier, driven by lower completions in London. The group expects to deliver profit before tax at the half year of £315m, up 7% on 2015.

Our View

Barratt Developments fell sharply in the wake of the UK's decision to leave the European Union. Concerns centred on the potential impact on the UK's economy, and the knock on effect on the UK's housing market.

However, shares across the sector have recovered as, again and again, housebuilders reveal steady demand and sales rates - although the London market does seem to be slowing. After initially saying that contingency plans were being readied, Barratt is now preparing for 'business-as-usual', with the caveat that investment in the land bank is slowing.

Uncertainty about Brexit aside, the industry is enjoying goldilocks conditions. 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, 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.

Reflecting this uncertainty, the shares offer a high prospective yield of 7.2%. That could provide an attraction to investors - although remember that house building is a notoriously cyclical industry. At present, the group trades on a forward price to book ratio of 1.2 times, above its historic average.

Q2 Trading Update:

Overall market conditions remain healthy, with strong demand in the period for new homes and sales rates improving slightly on the previous year.

Completions in the half fell to 7,180 (2015: 7,626), with average sales prices increasing 3.9% to £264,000 as a result of the mix of properties sold as well as underlying house price inflation.

London completions fell by more than 50% to 367 (2015: 842), although this reflects the timing of the group's H1/H2 build programme. Previous action to cut prices on a small number of prime London properties has stimulated demand, while further properties have been sold as part of bulk deals.

The group closed out the half with net cash of £195m, versus £24.2m a year earlier. This reflects the group's significantly reduced land purchases, just 5,262 plots versus 10,967 in 2015. The group expects to approve 15,000 plots in FY17 as a whole, and is on course to achieve its targeted land bank of 3.5 years by the year end.

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.