Barratt Redrow’s first-half revenue rose by 11% to £2.6bn. The growth was largely driven by a 5% rise in total completions to 7,444 new homes and a 4% rise in average selling prices to £365,000.
Underlying pre-tax profits fell by 14% to £200mn (consensus: £205mn), as higher use of buyer incentives weighed on margins.
Free cash flow fell by £0.1bn to £0.3bn. Net cash fell by £0.3bn to £0.2bn largely due to an increase in inventories, but is expected recover to £0.4-0.5bn year-end.
Full-year guidance has been reiterated, with the group expecting to complete between 17,200-17,800 new homes this year. Full-year underlying pre-tax profits are expected to rise around 21% to £590mn (consensus £597mn).
An interim dividend of 5.0p per share was announced, down from 5.5p.
The shares fell 5.0% in early trading.
Our view
Barratt Redrow delivered a mixed set of first-half results. The top line grew thanks to an uplift in new home completions and higher average selling prices. But profits came in a touch shy of market expectations due to an increased use of incentives to stimulate buyer demand, which disappointed markets on the day.
Increased uncertainty ahead of the later-than-usual UK Budget can take some of the blame. Buyers simply needed more convincing to sign on the dotted line. With that hurdle out of the way, we’re cautiously optimistic that challenges will ease over the second half.
Cost benefits are continuing to build as the integration of Barratt and Redrow nears completion. If operations can be streamlined and new homes delivered as expected, there’s plenty of opportunity for profits to rebound over the near-to-medium term. But as with any merger, there will be challenges.
Softer demand across London is a trend we’re seeing across the sector as affordability issues persist. It’s not a major issue for now, but it means the medium-term target to deliver up to 22,000 homes annually could take a while to reach.
Not only has the acquisition increased Barratt’s geographical reach, but it’s also increased the different types of customers it appeals to. The Redrow brand focuses on larger, higher-quality homes for more affluent buyers. The higher average selling prices of these homes should be a major positive for margins moving forward.
The order book is in good shape and growing, and there’s a strong landbank ready to be unleashed when the housing market recovers. But with the pace of interest rate cuts set to slow down, it’s more likely to be a slow-burning improvement, rather than any major spring back into life. And of course, there are no guarantees.
On the balance sheet side, structuring the acquisition of Redrow as a share offer means there’s still a sizable net cash position. That gives flexibility to cope with any bumps in the road in the near term. Barratt’s increased scale should give it extra bargaining power when purchasing materials, which should help limit build cost inflation between a manageable 1-2% this year.
Barratt's valuation isn’t overly demanding, reflecting the tricky market conditions. If the market picks back up, the group looks to be in a strong position to grow. But after a slow start to the year, there’s a lot of work to do to hit guidance. Currently, we see scope for full-year numbers to fall a little short of current market forecasts, which point to underlying pre-tax profits of around £597mn.
Environmental, social and governance (ESG) risk
Most housebuilders are relatively low risk in terms of ESG, particularly for those in Europe. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.
According to Sustainalytics, Barratt Redrow’s management of ESG risk is strong.
Commitments are in place to deliver net zero houses by 2030 through a combination of energy-efficient equipment, the use of renewables and the establishment of alternative heating technologies. While Barratt reports that all its revenues come from sustainable products, the total portion of recycled materials used in its operations is undisclosed.
Barratt Redrow key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.