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Barratt Developments - Another strong year

Nicholas Hyett | 12 July 2017 | A A A
Barratt Developments - Another strong year

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Barratt Developments plc Ordinary 10p

Sell: 766.40 | Buy: 767.20 | Change -17.40 (-2.21%)
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Barratt put in another strong performance this year, with sales and average selling prices continuing to improve. Full year profits are set to come in ahead of expectations.

The shares rose 1.6% following the announcement.

Our View

Barratt took its foot off the pedal in the immediate aftermath of the EU referendum, slashing spending on new land and readying contingency plans in the event of a crash. It need not have worried. The UK's biggest housebuilder is once again exuding an air of confidence.

Although house price growth has started to slow, and question marks remain over the London market, demand has generally remained strong. By February's half year results, Barratt felt comfortable enough to extend its capital returns plan and offer a more generous ordinary dividend.

There are plenty of factors supporting this decision. While interest rates may creep up from here, they look set to stay low by historic standards. That should support mortgage affordability, while the UK's ongoing housing shortage continues to stoke demand for new builds. Supportive government schemes, such as Help to Buy and the Lifetime ISA, remain in place, with a focus on new builds providing an added boost to the builders.

Operationally, performance has been good, and the balance sheet looks pretty solid as well. Gross margins have grown from 12.8% in 2012 to around 20% this year, although we have a niggling worry about rising land and other input costs.

The new dividend policy sees dividend cover fall from 3 times earnings to 2.5 times, and combined with the special dividends has boosted the prospective yield to 6.9%. That level of income is clearly attractive - although investors should bear in mind that these are goldilocks conditions, and housebuilding is a notoriously cyclical industry where things can change quickly.

Full Year Trading Update

Barratt Developments completed on 17,395 properties in the year, the highest level in nine years. The average selling price for the period rose 5.9% to £275,000 thanks to a combination of mix and underlying house price inflation.

More sales at higher prices are expected to push full year profit before tax up to £765m (2016: £682.3m), ahead of market expectations of £699m-£740m. That would see the group meet its financial targets of a 20% gross margin and 25% return on capital employed.

The group's forward sales position remains strong, with total forward sales of 9,762 plots (2016: 8,724 plots), equating to a value of £2.1bn. However, land prices do seem to be rising, with Barratt paying £51,750 per plot of land this year compared to £44,925 last year.

The group remains committed to the enhanced dividend policy it announced back in February, paying out 40% of earnings as a dividend as well as a proposed special dividend of £175m in November 2017 and 2018.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.