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Barratt Developments- increased guidance amid strong demand

Sophie Lund-Yates, Equity Analyst | 6 May 2021 | A A A
Barratt Developments- increased guidance amid strong demand

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Barratt Developments plc Ordinary 10p

Sell: 462.50 | Buy: 462.70 | Change -8.60 (-1.83%)
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Barratt delivered 4,481 new completions in the four months to 2 May, which is up 27.9% on this time last year, and 5.7% on pre-pandemic times. The boost reflects increased activity because of the original Help to Buy and stamp duty holiday deadlines.

The group said, "reflecting both strong trading and our successful increase in construction activity, we now expect FY21 wholly owned completions to be between 16,000 and 16,250 homes", and it now expects full year performance to be above current expectations.

A 7.5p interim dividend will be paid on 10 May and the group still aims to pay a full year dividend equivalent to 2.5 times earnings.

The shares rose 1.4% following the announcement.

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Our view

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

Turns out, being locked inside whetted the public's appetite for a change of scenery, and housing demand has continued to hum along a year later. The approaching end of the stamp duty holiday, coupled with a shift in the Help to Buy scheme meant Barratt's new completions jumped in the four months to 2 May. The group has also bumped its full-year completion expectations higher, but we've not come full circle just yet. Even in a best-case scenario, completions will still come in 9% below 2019 levels.

For now, the government is committed to keeping a floor under the market with 95% mortgages making it easier for new buyers to stomach rising house prices. But economic headwinds are 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 £1bn net cash hoard.

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

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

A lingering bugbear 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 at 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. In aggregate since 2018, so far Barratt's incurred charges of around £163m.

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: 11.0
  • 10 year average forward P/E ratio: 10.4
  • Prospective yield: 4.4%

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

Between May and January, net private reservations, per active outlet, per week increased to 0.83, compared to 0.52 in same period in 2020, and 0.79 in 2019. The group operated from an average of 346 active outlets, below both 2020 and 2019 levels. Barratt said there has been "some positive house price inflation experienced across the country".

The group is fully forward sold for 2021 with an order book comprising of 14,846 homes, worth £3.7bn. That's 9.8% ahead of pre-pandemic levels and 30.4% higher than 2020.

Build costs rose by roughly 3% during the period. Management expects build cost inflation to run between 1% and 2% for the full year.

Over the past four months, Barratt has approved the purchase of 6,399 land plots on 31 sites, bringing the year-to-date total to 12,034 plots on 66 sites. For the full year, the group expects to approve a further 2,000-4,000 plots. The group intends to bring total plots to 18,000-20,000 by 2022, covering 4.5 years of construction.

As at the end of April, Barratt had around £1.1bn of net cash, and undrawn credit of £700m. Year end net cash is expected to be around £1.0bn.

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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.