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Barratt Developments - completions back at pre-pandemic levels

Full year revenue rose 9.5% to £5.3bn, reflecting a 3.9% increase in completions back to pre-pandemic...

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Full year revenue rose 9.5% to £5.3bn, reflecting a 3.9% increase in completions back to pre-pandemic levels, and improved average selling prices. This helped offset build cost inflation, meaning underlying pre-tax profit rose 14.7% to £1.1bn.

Looking ahead, Barratt expects house prices to ''moderate'', which together with cost inflation of 9-10% means gross margins are expected to dip slightly. Overall the group said ''market fundamentals remain strong, reflecting the continued imbalance between housing supply and demand''.

A final dividend of 25.7p was announced, taking the full year payment to 36.9p. A £200m share buyback was announced, to be completed by the end of June 2023.

The shares were unmoved following the announcement.

View the latest Barratt Developments share price and how to deal

Our View

Barratt's performance is impressive. With the demand for houses still outweighing supply, the group's revamped completions and house prices are still climbing.

That's testament to the ongoing resilience of the private house buyer, seemingly undeterred by a drop in real income as inflation and a cost-of-living crisis start to take their toll.

There are signs that demand is easing in the broader housing market though, and house prices are expected to moderate in the near to medium-term. That puts added emphasis on driving volumes higher. We see that as the key factor driving Barratt's long-term goal of 20,000 completions a year.

The recent purchase of Gladman's is another step in the right direction, not only should it directly deliver around 500 new homes a year from 2025 on, but it'll help the group source strategic land.

The group's targeting gross margins, profits after build costs but before central and financial expenses, of 23% from the new land it buys - which if it can be sustained at the 20,000 properties a year rate would imply a significant improvement in operating profits.

However, build costs are being anything but co-operative. Trending at increases of 9-10%, that'll put pressure on margins if it doesn't come down sooner rather than later.

There's good news on the balance sheet side. An enviable net cash position in excess of £1bn gives some options. This includes returning some cash to shareholders with a £200m share buyback. We also note the group's reduced its dividend cover policy, which is effectively a loosening of the purse-strings. Either way, it helps prop up the 9.9% prospective dividend yield which reflects strong cash flow under the current conditions.

Remember though, conditions can change, and the group's dividend policy is directly linked to profits. So, if profits fall the dividend could too and they are variable and not guaranteed.

This is especially true in the current environment. Barratt is doing very well while conditions are amiable, but an economic downturn would hurt all housebuilders.

Ultimately, we think the long-term fundamentals of the UK housing market remain intact. Rising interest rates and a cost-of-living crisis have the potential to take some heat out of the market though, and housebuilder stocks have come under pressure this year due to some of those fears.

The current valuation could prove to be an attractive entry point, but only for those prepared to accept those inherent risks.

Barratt Developments key facts

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.

Full Year Results

Total completions rose to 17,908, of these 746 were joint ventures. Barratt continues to target total home completion growth of 3% to 5% in the new financial year, to between 18,400 and 18,800 homes.

The group's private reservation rate was 0.81 homes per outlet per week, up slightly from last year's 0.78. Average selling prices rose to £300,200, up from £288,000. Within that, private selling prices rose 4.7% to £340,800, while affordable prices were up 8.8% to £159,400.

Barratt is seeing continued inflationary pressure in its skilled labour supply as well as broader input costs. The group has pricing agreements in place for 73% of its material requirements up until December 2022.

Barratt generated free cash flow of £387.7m, and had net cash of £405m, once £733.6m of land creditors are taken into account.

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 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 7th September 2022