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Barratt Developments - Sales and prices see profits build

Nicholas Hyett | 5 September 2018 | A A A
Barratt Developments - Sales and prices see profits build

No recommendation

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: 708.00 | Buy: 708.20 | Change 10.80 (1.55%)
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Full year results showed revenue rising 4.8% to £4.9bn, as both completions and average sale prices increased. Profit before tax rose 9.2% to £835.5m, with operating margins rising 0.5 percentage points to 17.7%.

The Barratt board announced a final ordinary dividend of 17.9p per share, up 4.7% on last year, with the special dividend unchanged at 17.3p.

The share price remain broadly unmoved in early trading.

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Our view

The UK's biggest housebuilder has been splashing out.

The extension of its capital returns plan into 2019 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, and client satisfaction remains high.

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

Fortunately Barratt seems to have learnt its lessons from the financial crisis, albeit the hard way. The balance sheet is net cash before accounting for land creditors, which are falling, meaning the group is far better prepared for any downturn than it has been in the past.

Given that extra resilience, a prospective yield of 8.1% is clearly attractive. But investors should bear in mind that a large chunk 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 0.85.

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Full Year Results

Total housing completions of 17,579 were up 1.1% on last year, the highest number of completions in a decade. The average sales price across the group increased 5% to £288,900 - boosted by some house price inflation, but also an increase in completions in central London.

Margin improvements were driven by increased efficiency, partly thanks to the launch of more efficient housing types. Changes in mix and the development of land from the group's strategic land bank also supported margin gains.

Barratt averaged 380 active outlets throughout the year, with 0.72 sales per week per outlet.

Forward sales are up 11.1% on year-on-year to £3.1bn. Going forwards the group has set itself new targets of a minimum 23% gross margin on land acquisitions, volume growth of 3-5% and a minimum 25% ROCE.

The housebuilder is looking to return £175 million of capital to shareholders in November 2018 and again in November 2019.

From 2019 the £175m Barratt has earmarked to return to shareholders won't necessarily be delivered as a special dividend payment, but it might instead execute a share buyback, depending on market conditions.

The group purchased £933.9m of land in the year, equating to 20,951 plots.

Barratt finished the year with net cash of £791.3m in the bank, although this does not include a significant amount of land owed to land creditors.

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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.

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.