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Barratt Developments - profit expectations up as growth continues

George Salmon | 10 May 2017 | A A A
Barratt Developments - profit expectations up as growth continues

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Barratt Developments plc Ordinary 10p

Sell: 657.20 | Buy: 657.40 | Change 11.20 (1.73%)
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Trading year-to-date at Barratt has been strong, with forward sales and average selling prices both continuing to improve. In light of this sustained growth, the group is confident full year profits before tax will come in at the top end of analyst expectations. The shares rose 2.9% on the news.

Our view

Shares across the sector fell sharply after the Brexit vote, amid worries that the benign conditions the UK's housebuilders have been enjoying could be reversed. Barratt even informed the market it had readied contingency plans in the event of a crash. Fast forward 10 months however, and things look very different. Barratt, the UK's biggest housebuilder, is once again exuding an air of confidence.

Although question marks remain over the London market, recent updates have seen the builders report minimal impact on demand from the vote to leave. By February's half year results, Barratt felt comfortable enough to extend its capital returns plan and offer a more generous ordinary dividend.

Lingering uncertainty about Brexit aside, it's easy to see where its confidence comes from. Low interest rates look like they are here to stay, and are helping mortgage affordability remain high, while the UK's ongoing housing shortage continues to stoke the fires of demand. Supportive government schemes, such as Help to Buy and the Lifetime ISA, remain in place, with some focusing on new builds, proving an added bonus to the builders.

Operationally, performance has been good. The balance sheet looks solid, and gross margins have grown from 12.8% in 2012 to 18.9% in 2016. The group is targeting 20% this year.

The new dividend policy, to reduce dividend cover from 3 times earnings to 2.5 times, combined with the special dividends the group is looking to pay out, has boosted the prospective yield to over 6.5%. The prospect of that income is clearly attractive - although investors should bear in mind that conditions can hardly get more favourable, and housebuilding is a notoriously cyclical industry where things can change quickly.

Trading update:

From 1 January to 7 May 2017, Barratt launched 46 developments, and operated from an average of 384 active outlets (including JVs) a week. This is 9 more than over the same period in 2016.

Average selling prices have risen, benefitting from a more favourable sales mix as well as some underlying house price inflation. As at 7 May, total forward sales (including JVs) were at record levels, up 12.7% to £3.2bn, with an average of 299 net private reservations made per week.

The group now expects its net cash position at the full year stage to be around £600m, ahead of previous expectations. This can be attributed to strong trading and the timing of land and working capital payments. Barratt anticipates monies owed to land creditors, which are not included in the net cash figure, to remain around one third of the land bank in the medium term.

Barratt is on track to deliver c. 16,650 wholly owned completions for the full year.

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.