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Barratt Developments - higher completions boost revenue

Sophie Lund-Yates, Equity Analyst | 5 February 2020 | A A A
Barratt Developments - higher completions boost revenue

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Barratt Developments plc Ordinary 10p

Sell: 498.70 | Buy: 499.60 | Change -35.00 (-6.58%)
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First half revenue rose 6.3% to £2.3bn, reflecting an increase in completions offsetting lower average selling prices. The group continued to make progress on margins.

Management proposed extending the capital return plan with £175m of special returns in November 2020 and 2021.

The shares rose 4.8% 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 these conditions won't last forever. House buyer sentiment is wavering, and build cost inflation is creeping in. Added to that, the government's announced Help to Buy will end in 2023, which has the potential to whip the rug from under the feet of a large number of Barrett's buyers.

The potential for future volatility is behind Barratt's plan to distribute future shareholder returns through a combination of buybacks and special dividends. When shares fall, investors are often better served through buybacks as opposed to special dividends, so we think this flexible approach is the right one, even if it means the 5.8% dividend yield dries up.

Management confidence will be boosted by a strong operational performance to date, with improving client satisfaction and increasing underlying 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.

Barratt has taken the decision to lower exposure to the subdued central London property market, where economic headwinds are dulling performance. While that's contributing to lower average selling prices, it's a sensible move in our view and should help insulate margins. Barratt is also keen to flag stronger financial foundations. In marked contrast to the last housing crisis the balance sheet is packed with net cash, before accounting for land creditors - and even here borrowing is falling.

All-in-all, Barratt is doing well with the options available. But the fate of the wider housing market is outside its control, and if the housing market malaise spreads beyond London, Barratt will struggle.

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Half year results

Total completions rose 9.1% year-on-year. Barratt completed 6,301 private homes in the first half, up 3.7% on last year, and these were sold for an average of £312,000 down from £317,300, reflecting fewer London properties. Outside London average selling prices increased 2.6% to £303,900.

The group completed 1,699 affordable homes, up 28.3% on last year. Because more affordable sales were made in London, the average selling price of affordable homes rose from £120,900 to £160,000.

In total, average selling prices fell from £282,200 to £279,800.

The group made an average of 0.69 private reservations per outlet per week, compared to 0.64 last year. Barratt operated out of an average of 372 outlets, compared to 376 last year, and opened 45 new outlets.

Barratt's adjusted gross margin hit its target of 23%, an increase from 22.4% last year. However, removing and replacing cladding on legacy buildings cost £17.8m, dragging unadjusted gross margins down from 22.6% to 22.2%.

Half year operating profit increased from £409.7m to £421.7m, and the group's adjusted operating margin increased 0.4 percentage points to 19.4%.

The improved profitability meant as at 31 December 2019 the group had £433.8m of net cash, up 11.9% compared to last year. The land bank stands at 80,846 owned or controlled plots, equivalent to 4.6 years' supply.

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