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Barratt Developments - guidance upgraded, but prices lower

Nicholas Hyett | 10 July 2019 | A A A
Barratt Developments - guidance upgraded, but prices lower

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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: 795.80 | Buy: 796.60 | Change -5.80 (-0.72%)
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Barratt Developments has said full year pre-tax profit will be ahead of expectations, at around £910m. That's being driven by improved margins and a better-than expected performance from joint ventures.

The shares were broadly flat 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.

The problem is, conditions are almost too good to be true. 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, conditions could change at short notice and the share price would quickly follow suit. The potential for future volatility is behind Barratt's plan to distribute future shareholder returns through a combination of buybacks and special dividends.

Arguing that, should shares fall, 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, whatever the market may think. Although, there's no guarantee it's the company, and not the market, reading the situation correctly.

Management confidence will be boosted by a strong operational performance to date, with improving client satisfaction and increasing margins. BDEV's been using pre-fab structures for a number of homes, which not only take less time to construct, but are cheaper too. A recently acquired timber manufacturer, is also set to deliver meaningful cost savings.

The group's taken advantage of the recent housing boom to build 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. That means Barratt 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 the dividend is 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, rising to 7.6% once the special dividend is taken into account.

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Full year trading update

Sales rates were broadly in line with recent years, with average private reservation rate per outlet per week at 0.76 in the second half of the year. 163 new outlets were opened during the year, and Barratt is currently operating from an average of 379 sites, including joint ventures (JVs). Total forward sales, including joint ventures, are now worth £2.6bn, representing 11,419 homes.

The average selling price of Barratt's private homes was £312,000, lower than 2018's £328,000. That reflects lower exposure to the more expensive London market, partially offset by house price inflation.

The group remains mindful of the uncertain economic environment, and experienced 3-4% build cost inflation in 2019, and expects a similar level in 2020. However, the group remains focused on improving margins, and expects an operating margin of 18.9% (2018: 17.7%). The roll out of more efficient house types, and the purchase of land at a higher gross margin are the drivers behind this.

Barratt said the current land bank equates to around a 3.9 year supply with planning consent, and spent £940m on acquiring new sites this year.

Net cash stood at £765m as at 30 June, ahead of guidance. Land creditors have been reduced to around 31% of the overall land bank.

As previously announced, a special dividend of £175m will be paid to shareholders in November 2019 and 2020. This is in addition to the existing policy to pay ordinary dividends covered 2.5 times by earnings.

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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.