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Barratt Developments - completions up

Nicholas Hyett, Equity Analyst | 14 October 2020 | A A A
Barratt Developments - completions up

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Barratt Developments plc Ordinary 10p

Sell: 525.40 | Buy: 525.80 | Change -5.20 (-0.98%)
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Between 1 July and 11 October Barratt completed 4,032 homes, up from 3,252 last year. The group's sales rate was 0.87 per outlet per week, compared with 0.72 last year.

Assuming no further national lockdowns Barratt expects to grow completions to between 14,500 and 15,000 this year, plus around 650 from joint ventures. The group remains committed to its medium term target of a 25% return on capital employed.

The shares were broadly flat 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 well, despite the lack of higher loan to value mortgages on offer. Nationwide's house price index is showing continued strength, and Barratt recently reported stable pricing and a very impressive recent sales rate.

Barratt adopted a number of measures to preserve cash during the crisis, including cancelling the dividend. When the dividend returns management intends to pay out 40% of profits. Although painful upfront for, it's been good for the group's cash position.

There are also reasons to be hopeful longer term. The fundamentals of the UK housing market are still attractive. Low interest rates are supporting mortgage affordability and an ongoing housing shortage underpins demand.

But while this is all undeniably good news, 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.

The group is committed to spending almost half a billion pounds on land next year. While manageable as things stand the plan could prove onerous if we get a disruptive second wave over the winter or house prices fall. However, its expenditure the group has to make - inventory levels must be kept up to support future building.

It doesn't help that the current form of Help to Buy is due to come to an end in 2021. The scheme was used by 51% of Barratt buyers at the last count. Barratt wants the government to consider further help for first time buyers, and the Chancellor is likely to want to support house prices. There are a lot of demands on the public purse at the moment though, and this may not be a priority.

Putting politics to one side, the next few months are crucial. Construction sites are whirring back into action and buyers are showing willing, but we're not out of the woods yet.

Barratt Developments key facts

  • Forward P/E ratio: 10.3
  • 10 year average forward P/E ratio: 10.8
  • Prospective yield: 3.9%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Trading update

After a short break at the beginning of the pandemic Barratt re-entered the land market. The group has recommenced the purchase of 4,160 plots on 15 sites and has approved 484. The forward order book stands at 15,135 homes valued at £3.6bn, up from 12,963 worth £3.1bn last year.

Management pointed out that the lack of 95% LTV mortgages was increasing reliance on Help to Buy, which accounted for 51% of private sales compared with 45% last year.

Barratt currently has around £570m in net cash as well as £700m in undrawn credit. The group is targeting "minimal year end total indebtedness" in the medium term.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.