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Barratt Developments - pent up demand means strong first half

Nicholas Hyett, Equity Analyst | 4 February 2021 | A A A
Barratt Developments - pent up demand means strong first half

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Barratt Developments plc Ordinary 10p

Sell: 664.80 | Buy: 665.20 | Change -18.80 (-2.74%)
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Revenue increased 10.1% to £2.5bn in the first half, helped by a record 9,077 completions and a modest increase in average selling prices.

For FY 21, the board expects wholly owned completions to be between 15,250 and 15,750 plus another 650 joint venture completions.

Barratt plans to pay a 7.5p interim dividend.

The shares were up 3.4% following the announcement.

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Our view

Barratt's first half results tell a story that's been on repeat among the housebuilders: they're doing better than expected.

The demand squashed by the first lockdown was pulled into the second quarter and gave Barratt some stellar first half figures. Add to that management's cautious spending cuts and you have an impressive cash position on top of humming demand.

But we're mindful that half-year results aren't a reliable long-term signpost for what's to come. Spread evenly throughout 2020, demand was stronger than first feared, but not spectacular. Overall though, we're encouraged to see demand in the current quarter holding up despite the approaching end to the stamp duty holiday and Help to Buy scheme.

We're not expecting the demand for new houses to nose-dive, but it's not unreasonable to expect the appetite to buy will plateau in the absence of support from the government. Leftover lockdown demand should dry-up this year offering a more realistic (and likely less rosy) picture of the housing market. Economic headwinds are also on our radar with the pandemic subsiding. Rising interest rates would hit Barratt, and all housebuilders for that matter, because it would make mortgages more expensive. A severe recession would also be bad news, and quickly eat into the group's hard-earned cash reserves.

That brings us nicely to one of Barratt's main attractions.

As the pandemic-related dust settles, we expect group spending to pick up too. The resumption of dividend payments is part of that, and given the healthy cash flows and strong balance sheet (supported by comfortable margins), means dividend plans should be uninterrupted. Remember though, no dividend is guaranteed - and that's especially true at the moment.

A lingering bug bear is rising costs to adjust legacy properties. The first half of the year saw these costs rise sharply, due to unsafe cladding and structural issues one of its sites. This isn't something to focus on right now, but we'd like to see those costs moving downwards, as proof this isn't a widespread issue.

Ultimately, Barratt has come out of the crisis in good health, and we think the long-term fundamentals of the UK housing market remain intact. That should hold Barratt in good stead, but investors should remember that a worse-than-expected economic downturn will hurt the housebuilders. We can't rule this out in the short to medium term. For those prepared to accept the external risks, we think Barratt is a strong name in its sector.

Barratt Developments key facts

  • Forward P/E ratio: 10.5
  • 10 year average forward P/E ratio: 10.6
  • Prospective yield: 4.3%

All ratios are sourced from Refinitiv. 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

Total completions for the first half rose 9.2%, helped by pent up demand from the first lockdown and buyers' desire to take advantage of the stamp duty holiday and help to buy scheme. On average, the homes sold for £283,500, a 1.2% increase.

The group completed 6,903 private homes, which sold at an average price of £319,500, 2.4% higher than last year. There were 1,796 affordable home completions, which were sold for an average of £145,300--a 9.2% decline due in part to fewer units delivered in more expensive markets like London.

Barratt operated out of 342 outlets (2019:372) during the first half, with an overall sales rate of 0.77 net private reservations per week, an 11.6% increase. The sales rate jump is attributed to strong sales in the first quarter due to pent-up demand, and more normal levels in the second quarter.

Adjusted gross margins increased to 23.8% (2019: 23%). However, including the cost to repay the government's furlough grant and £51m worth of repairs to legacy properties, unadjusted gross margins fell from 22.2% to 20.6%.

Operating profits rose 14.9% to £505.2m and adjusted operating margins increased to 20.3% from 19.4%.

The group finished the half with £1.1bn in net cash, up from £433.8m a year ago, due in part to management's efforts to strengthen the balance sheet by pausing dividend payments and capital expenditures at the onset of the pandemic.

As at 31 December, Barratt's land bank was worth £2.8bn with 75,610 wholly owned and controlled plots. That equates to 5.9 years of supply, an increase from the 4.6 years supply in 2019.

The group is now 95% forward sold for the financial year, with 14,289 homes secured for completion. 81% of those homes are due to complete beyond 31 March 2021, when the stamp duty holiday has finished.

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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 Refinitiv. 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 for more information.