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Barratt Developments - full year outlook ahead of expectations

Nicholas Hyett | 9 May 2019 | A A A
Barratt Developments - full year outlook ahead of expectations

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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 Developments has said the full year outlook is modestly ahead of management expectations, with sales up compared to last year.

The shares were little moved following the announcement.

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Our view

Conditions have been favourable for housebuilders these last few years. Interest rates are still low by historical standards, which supports mortgage affordability. Meanwhile, the UK's ongoing housing shortage continues to stoke the fires of demand. The icing on the cake is Help to Buy, which is biased in favour of new builds.

But Brexit could be a major buzzkill. House buyer sentiment is already wavering, and build cost inflation is creeping in. Added to that, the government's announced Help to Buy will end in 2023.

All-in-all, sentiment could change at short notice and the share price would quickly follow suit. This potential for future volatility is behind Barratt's plan to distribute future shareholder returns through a combination of buybacks and special dividends.

Arguing that shareholders would be better served through buybacks than special dividends is a reassuring message for investors. It implies the company remains confident in its prospects, despite what the market may think. Although, there's no guarantee it's the company, and not the market, that's read the situation correctly.

Management confidence will be boosted by a strong operational performance to date, with improving client satisfaction and increasing margins. In fact, Barratt expects margins to come in ahead of previous expectations this year, no mean feat.

The group's on solid financial foundations too. In marked contrast to the last housing crisis, the balance sheet is net cash before accounting for land creditors, which are falling. All that means Barratt's is far better prepared for any downturn than it has been in the past.

Given that extra resilience, the shareholder returns on offer are clearly attractive, but investors should bear in mind that a large chunk of that is deemed a special pay-out. That puts it particularly at risk if we get a crash.

Looking only at the ordinary dividend, the prospective yield is 4.6% for this year.

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Trading details

Average reservation rates per outlet per week were 0.79, which was slightly below the 0.80 seen last year. The group operated an average of 388 outlets and launched 47 new developments in the period.

Total forward sales, including joint ventures, showed a 2.4% increase to £3.4bn.

Barratt continues to focus on improving margins, acquiring land at high gross margin, and rolling out more efficient build-types. Overall, the group expects to deliver an improvement on the Board's margin expectations for the full year.

As previously announced, Barratt plans to make special returns to shareholders of £175m in November 2019 and November 2020.

The group remains mindful of the political and economic environment, and continues to expect build cost inflation of 3%-4%. Volume increases for the full year will be at the lower end of guidance.

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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 disclosure for more information.