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Barratt Developments - Building confidence

George Salmon | 21 February 2018 | A A A
Barratt Developments - Building confidence

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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: 669.00 | Buy: 669.20 | Change -8.60 (-1.26%)
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Half year results at Barratt Developments saw continued progress in revenues, margins and profits.

The group announced an interim dividend of 8.6p per share, up 17.8% on last year. This represents one third of the ordinary dividend expected for the full year.

In addition to the £175m (around 17.3p per share) it already expects to pay in November 2018, the group has announced its intention to pay a further special dividend of £175m in November 2019.

The shares rose 2.5% on the news.

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Our View

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 extension of its special dividend policy and the surge in land purchases suggests it thinks the current housing boom has further to run. It's easy to see why.

The sector has plenty of tailwinds. Interest rates may creep up but look set to stay low by historic standards, supporting mortgage affordability. Meanwhile the UK's ongoing housing shortage continues to stoke the fires of demand for new builds. Supportive government schemes, such as the Lifetime ISA, Help to Buy and stamp duty tax breaks, are geared towards new builds and first time buyers, providing an added boost to the builders.

It'd be unfair to say all of Barratt's recent success has been down to being in the right place, at the right time. Operational performance has been good. Gross margins have grown from 12.8% in 2012 to 20% last year, and measures to improve efficiency in the construction process look to be delivering.

However, there's no getting away from the fact macro conditions set the tone, and these goldilocks conditions could change quickly.

One positive is that the group now has a net cash position, before accounting for land creditors. This means the balance sheet carries much less debt than at the time of the last crisis. Barratt seems to have learnt its lessons, albeit the hard way.

The prospective yield is 7.2%. That level of income is clearly attractive - although investors should bear in mind that close to 40% of the payout is due to special dividends. No dividend is guaranteed, but specials are particularly flaky.

The shares trade on 1.25 times book value, our preferred valuation method for capital intensive industries like housebuilding. The longer-term average is more like 0.82.

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First half trading details

Total completions in the six months to 31 December 2017 rose 2% to 7,324, in-line with plans for modest growth in FY18. Barratt's houses sold for an average of £281,000 a 6.5% increase on the prior year's average selling price. These factors helped revenue rise 9.5% to £2bn.

A slight improvement in operating margin, from favourable purchase terms and increased use of a new, simpler build, saw operating profit rise 9.6% to £355.2m. A lower contribution from joint ventures meant pre-tax profit rose 6.8%, although at £342.7m, this is a record performance.

The purchase of £641.2m of land has swollen the land bank to 83,617 total plots, around five years of supply at current sales rates. This includes 19,075 in the strategic bank, which represents land yet to receive planning permission.

The net rate of private reservations was 0.68 per active outlet per week, in-line with a strong prior year. However, Barratt says the second half has started strongly, with a quicker pace of sales helping the rate rise to 0.82 so far.

Before factoring in land creditors, net cash at 31 December stood at £165.9m (2016: £196.7m). The decline reflects its extra land purchases and payments to shareholders.

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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.