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Barratt Developments - more positive signs in housebuilding

Emilie Stevens, Equity Analyst | 6 July 2020 | A A A
Barratt Developments - more positive signs in housebuilding

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Barratt Developments plc Ordinary 10p

Sell: 664.80 | Buy: 665.20 | Change -18.80 (-2.74%)
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All of Barratt Development's operational sites have reopened as of 30 June, and the group is experiencing a high level of interest from customers.

The group has taken 0.63 private reservations per active outlet per week in the last six weeks, compared with 0.69 in the same period last year. Pricing has remained broadly stable.

In the year ending 30 June Barratt completed on 12,604 homes including joint ventures, compared with 17,856 last year. The group attributes the decline to the lockdown. The forward order book stands at 14,326 homes with a value of £3.2bn, compared with 11,419 homes valued at £2.6bn at the same point last year.

The shares rose 6.2% following the announcement.

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Our view

The news coming from the housebuilders has been better than we expected.

Crucially, house prices appear to be holding up, even though there's a lack of higher loan to value mortgages on offer. Nationwide's house price index did show a small fall in June, but the housebuilders themselves have reported stable pricing and recovering sales rates. Overall, early evidence points to a more resilient housing market than expected.

This is undeniably good news, but there's no guarantee it can be sustained.

The economy could still slide into a prolonged recession, and if house prices fall the builders could struggle to turn a profit on the land they've already purchased. While we've been impressed by the way these groups have handled the lockdown, this would be a far more uncomfortable development.

Barratt's adopted a number of measures to preserve cash during the crisis, including cancelling the dividend. Although painful for shareholders in the short term, this 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 £350m in cash and also has access to £700m undrawn credit.

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.

It's worth remembering, however, that the current form of Help to Buy is due to come to an end in 2021. Barratt is calling for the current scheme to be extended, but as there are a lot of demands on the taxpayer at the moment this may not be a priority for the Chancellor.

In the meantime, the next few months are crucial. While it's good news construction sites are whirring back into action, new business activity and therefore growth prospects are likely to remain subdued for some time. Investors need to be aware that we're not out of the woods yet.

Barratt Developments key facts

  • Forward P/E ratio: 10.0
  • 10 year average forward P/E ratio: 11.4
  • Prospective yield: 5.1%

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Full year trading update

Barratt's sales rate (net private sales per active outlet per week) for the full year was 0.60, compared with 0.70 last year. Up to 22 March the sales rate stood at 0.73, compared with 0.68 last year. The group operated from an average of 366 active outlets during the year, and as of 30 June was operating from 348.

The group's average selling price was £280k, up from £274k last year, while the average private sales price was £311k, down slightly from £312k last year.

As of 30 June Barratt had £305m of net cash on the balance sheet, down from £766m at the same point last year. The group has £700m of undrawn credit and access to the Covid Corporate Financing Facility if necessary.

The group's land creditor position stands at £800m which represents around 25% of the land bank, down from £961m last year. Roughly £350m of the land payments fall in the first half of the group's new financial year.

Following the tragedy at Grenfell, Barratt is paying to remove and replace Aluminium Composite Material ('ACM') cladding at sites they have previously worked on, and pay for any other remedial action needed. The group does not think it is legally liable for this work, but expects the costs to total around £70m.

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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.