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Barratt Developments - Prices climbing, but sales rates flat

Nicholas Hyett | 11 January 2018 | A A A
Barratt Developments - Prices climbing, but sales rates flat

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Barratt Developments plc Ordinary 10p

Sell: 730.60 | Buy: 731.00 | Change 12.60 (1.75%)
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Barratt saw a small improvement in total completions over the first half of the year, although sales rates remained flat. The group's average sales price rose 6.5% to £281,000.

The shares fell 1.5% in early trading.

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Our View

Having taken its foot off the gas in the immediate aftermath of the EU referendum, the UK's biggest housebuilder is splashing out once again.

Barratt felt comfortable enough to extend its capital returns plan in February 2017, offering a more generous ordinary dividend. More recently the surge in land purchases suggests Barratt thinks the current housing boom has further to run. With demand generally strong and prices rising, that seems a reasonable assumption, but investors should remember that housebuilding is a notoriously cyclical industry where things can change quickly.

For now at least, the sector has plenty of tailwinds. While interest rates may creep up, they look set to stay low by historic standards. That should support mortgage affordability, while the UK's ongoing housing shortage continues to stoke the fires of 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. Gross margins have grown from 12.8% in 2012 to 20% last year, and the group is taking measures to improve efficiency in the construction process. This is encouraging, although investors should note that land prices and other input costs have been rising.

The prospective yield is 6.4%. That level of income is clearly attractive - although investors should bear in mind that these are goldilocks conditions for housebuilders and they can't last forever.

The shares trade on 1.4 times book value, our preferred valuation method for capital intensive industries like housebuilding. The longer-term average is more like 0.8.

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First Half Trading Update

Total completions rose 2% to 7,324 in the first half, of which 17% were affordable homes. Sales rates of 0.68 per active outlet per week were flat on last year, although the number of active sites increased slightly to 376 (2016: 374).

Barratt believes it is well positioned for the second half of the year, with 10,921 plots forward sold, up 3.8% on last year, at a value of £2.4bn.

The group approved £641.2m of land purchases in the period, covering 51 sites and 13,263 plots, and representing and significant step up on the same period last year. The group's newly acquired land is expected to exceed Barratt's minimum hurdle rates of 20% gross margin and 25% site ROCE (Return on Capital Employed).

Before factoring in land creditors, net cash at 31 December stood at £165m (2016: £196.7m), with the decline reflecting success in land purchasing and payments to shareholders. The group remains committed to paying a special dividend of £175m in November 2018.

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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 for more information.