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Barratt Developments- profit to be at the top end of expectations

William Ryder, Equity Analyst | 14 July 2021 | A A A
Barratt Developments- profit to be at the top end of expectations

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Barratt Developments plc Ordinary 10p

Sell: 717.40 | Buy: 718.00 | Change -1.20 (-0.17%)
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Barratt expects full year underlying pre-tax profit to be at the top end of market expectations, which are between £860m and £890m. This follows an ''excellent'' recovery in completion volumes to 17,243 homes, up 36.8% on last year and 3.4% behind 2019.

The group expects to report full year results on 2 September.

The shares were broadly flat 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 much better than we feared when the pandemic started.

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. Despite the end of the stamp duty holiday, coupled with a shift in the Help to Buy scheme meant Barratt's new completions have almost fully recovered to 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. Build cost inflation is running at 3-4% and rising interest rates on the back of a general inflation 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.

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 price/earnings ratio: 9.2
  • 10 year average forward price/earnings ratio: 10.2
  • Prospective yield: 5.6%

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

Net private reservations per active outlet rose from 0.60 last year to 0.78, which is ahead of the 0.70 recorded in 2019. The group operated from an average of 343 outlets over the year, down from 366, and was operating from 358 at the end of June.

The group's average selling price rose 3.1% to £289k, and the average private price was £325k, up 4.6%.

The group has forward sold 14,334 homes worth £3.5bn, compared with 14,326 worth £3.2bn last year and 11,419 worth £2.6bn the year before. The private average selling price of the forward sold homes was £339.8k, up from £320.2k last year.

The group has seen build cost inflation of about 2% for the year, but the group is currently seeing increases of 3-4%.

Barratt has repaid £26m under the Coronavirus Job Retention Scheme and has incurred £81m in costs for fire safety in legacy buildings.

Barratt approved £876.8m in land spending this year, amounting to around 18,000 plots. The group is still targeting a land bank with around 4.5 years' worth of property in it, and expects to buy a further 18,000 to 20,000 plots next year.

As of 30 June, Barratt had £1.3bn in net cash and £700m in undrawn credit. The group owes £660m for land, which is about 22% of the owned land bank.

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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.