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Barratt Developments - economic uncertainty weighs on sales

Between July and October, Barratt Developments saw its net private reservations, per average week, fall to...

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Between July and October, Barratt Developments saw its net private reservations, per average week, fall to 188 compared to 281 last year. This reflects the effect of economic uncertainty, including cost-of-living concerns, higher interest rates which make mortgages more expensive, and reduced mortgage availability.

The group's on track to deliver full year underlying pre-tax profit of around £972.5m, in-line with market expectations. Build cost inflation of 9-10% is also still expected.

The shares fell 5.2% following the announcement.

View the latest Barratt Developments share price and how to deal

Our View

We're seeing the first real cracks in the housing market. Demand for new builds is cooling.

Higher borrowing costs are weighing on mortgage affordability and availability. The average cost of a two-year fixed-rate loan is now about 6%. With a broader cost of living crisis and economic uncertainty, means people are simply less likely to wander into a show home, and even less inclined to sign on the dotted line.

At the same time, Barratt is grappling with 9-10% build cost inflation. That will put significant further pressure on margins if something doesn't give. Profits have already been downgraded from previous expectations, but there is room for this to get worse.

Looking beyond the current turmoil, there are some bright spots. The group is still successfully raising its house prices, which is helping to offset the worst of the problems for now.

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

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 program announced in September 2022. 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 10.8% prospective dividend yield. But keep in mind that yields consider share price performance as well as projected payments, so the current yield likely reflects some uncertainty too. With a long time remaining until the financial year-end, we can't rule out further downgrades.

And as when conditions change, the group's dividend policy is directly linked to profits. So, if profits fall further the dividend could too and they are variable and not guaranteed.

Ultimately, the long-term fundamentals of the UK housing market remain intact. But all housebuilders are cyclical beasts. Their fortunes tend to expand and contract in line with the economy. Recession fears and widespread borrowing uncertainty means the housebuilders are in a tricky spot on the current cycle. Barratt is in resilient financial position, so we're not looking at an existential catastrophe. But ups and downs are to be expected in the current environment, and that's reflected in the serious market pressure housebuilder stocks have faced this year.

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.

Trading update

Barratt launched 25 new developments, including joint ventures, in the period. This was in line with expectations. The group operated from 351 active outlets, down from 338 last year. The average selling price for private homes was 9.6% higher than the same time last year, at £377,200.

The reduced sales reservation rates meant total forward sales were 13,314 homes, down from 15,393. This is still 2.7% higher than 2019. The value of the forward order book stands at £3.6bn, about a £300m reduction on the same time last year. For privately owned homes, Barratt is 64% forward-sold.

3,608 homes were completed, down from 3,699 last year, but in-line with ''budget plans''. Completions are expected to be 55% weighted to the second half of the financial year.

The group is maintaining its disciplined approach to buying new land, leading to much lower net land approvals. Overall, Barratt approved the purchase of 813 plots in the period, down nearly 80%. Market conditions means approvals are expected to be substantially below replacement level in the 2023 financial year.

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: 12th October 2022