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Barratt Developments - COVID-19 update

Sophie Lund-Yates, Equity Analyst | 16 April 2020 | A A A
Barratt Developments - COVID-19 update

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Barratt Developments plc Ordinary 10p

Sell: 628.20 | Buy: 628.80 | Change 0.00 (0.00%)
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Barratt Developments has confirmed all its sales centres, construction sites and offices closed by 27 March.

The group reiterated it will not be able to provide any financial guidance until the impact of COVID-19 becomes clearer. As well as the previously announced measures to preserve cash, Barratt has said it's furloughing 85% of its workforce on full pay. All Executive Directors, the wider Executive and Regional Managing Director team, the Chairman and the Non-Executive Directors have agreed to a voluntary 20% reduction in base salary and fees.

The shares rose 3.9% following the announcement.

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Our view

Prior to the outbreak of coronavirus, conditions were favourable for housebuilders. The story has since changed. A national lockdown and major economic uncertainty means moving house is being wiped off to-do lists, and construction has ground to a halt.

The disruption means Barratt now faces the prospect of both falling demand and prices. Together this will have an immediate impact on revenues and profits, which will then eat into cash. In response the group's focused on preserving as many pennies as it can. That's the right decision in our view.

The group's adopted a number of measures, including cancelling the interim dividend, which although painful for shareholders in the shorter could mean survival in the long run.

To the group's credit its balance sheet is in much better health than the last housing crisis. Barratt has around £450m in cash and also has access to £700m undrawn credit.

The key question for both Barratt and its investors is 'how long'. If COVID-19 disruption is short-lived that could mean the UK can get back on track relatively quickly. However, the longer the disruption the greater the pressure on Barratt's cash resources. There's also risk of a sustained economic slowdown or recession, which could mean performance is subdued over a longer period.

If the group manages to avoid permanent damage there are reasons to be hopeful for the future. The long term fundamentals of the UK housing market will still exist - low interest rates supporting mortgage affordability and an ongoing UK housing shortage underpinning demand. And Barratt's quality proposition is well placed to meet it.

In the meantime, the next few months are crucial for many UK businesses, and especially housebuilders. So we think Barratt's decision to focus more on immediate finances than forecasts is the right one. Investors should go into the next few months fully aware that it could get uglier before any signs of improvement. Though as always, it remains to be seen whether the share price has already accounted for the worst case scenario.

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COVID-19 update

Between 23 March 2020 and 12 April 2020, the group completed 1,349 homes, including joint ventures. For the year to date the group has completed 11,713 homes, compared to 10,954 last year.

Total forward sales include 12,376 homes, with a value of £2.9bn. The group said "whilst our sales centres and construction sites remain closed, we expect any further home completions and reservations to be very limited".

The group has around £450m of cash, as well as £700m in undrawn credit. Barratt is exploring other government funding options.

Barratt has taken a number of measures to manage the group's cost base and cash flow including: suspending all land buying, stopping recruitment and postponing non-essential capital expenditure. It also cancelled the interim dividend, saving around £100m.

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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.