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Barratt Developments - trading in-line

George Salmon | 10 May 2018 | A A A
Barratt Developments - trading in-line

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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: 623.40 | Buy: 624.00 | Change 6.60 (1.07%)
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Barratt Developments has released a brief trading update.

The group says trading is strong and the outlook for the full year remains in line with the Board's expectations. The shares were little moved on the news.

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Our view

The UK's biggest housebuilder has been splashing out.

Barratt extended 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 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 7.7%. 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 1.3 times book value, our preferred valuation method for capital intensive industries like housebuilding. The longer-term average is more like 0.81.

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Trading details

Total forward sales (including Joint Ventures) as at 6 May were up 2.5% on the prior year at a value of £3.3bn across 13,655 plots. Private forward sales value was up 0.2% at £2.2m. The sales rate, which tracks net private reservations per active outlet per average week, remained stable at 0.8.

The group says there are excellent land opportunities available, and expects to spend around £1.1bn on around 20,000 new plots. Despite this higher spending, Barratt anticipates having a year-end cash balance above previous expectations of £550m. This is partly because the group continues to acquire new plots with deferred payment terms.

Barratt continues to roll out its new housing design, and the group says this should increasingly benefit margin going forward.

Find out more about Barratt Developments shares including how to invest

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.