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Barratt Developments - full year guidance intact

Barratt Development's net private reservation rate was 0.65, down from 0.93 the year prior.

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Barratt Developments' net private reservation rate was 0.65, down from 0.93 the year prior, reflecting a "challenging backdrop for first time buyers".

Total forward sales as at 23 April 2023 were 11,525 homes, which represents a 29% decline on last year. The value of these forward sales was £3.0bn, representing a decline of 34.4%.

Total completions in the period fell from 3,915 to 3,194. This reflects the reduced forward order book carried into the period as well as the closure of the Help to Buy scheme.

Build cost inflation is expected to come in at 9-10% this financial year, before slowing to around 5% next year. The net cash position stands at around £600m and is expected to increase to around £900m by the end of the year.

The group's £200m buyback program remains ongoing, with £154.5m of buybacks completed so far.

Full-year completions are expected to be between 16,500 and 17,000, in line with previous guidance. The group's CEO, Davis Thomas, expects to deliver "full year profit before tax in line with current market expectations" of around £877m.

The shares were flat following the announcement.

View the latest Barratt Developments share price and how to deal

Our view

There were no big surprises in Barratt's latest trading update. The uptick in sales rates seen in January continued across the important spring selling season, but remain some way below levels seen 12 months ago.

Higher borrowing costs are weighing on mortgage affordability and availability. While mortgage rates have pulled back slightly of late, the average cost of a two-year fixed-rate loan is still above 5%. With a broader cost-of-living crisis and economic uncertainty, people are simply less likely to wander into a show home, and even less inclined to sign on the dotted line than they were a year ago.

These challenges are reflected in the value of Barratt's forward sales, which have fallen around 34% to £3.0bn. However, the group's fully sold for the current financial year, giving us some comfort around the recent profit before tax guidance of £877m.

Whilst fewer houses are being sold, there is some good news on the top line. The group's average selling prices are being pushed higher by an increased proportion of London completions as well as underlying house price inflation.

But this comes with a caveat. London sales are usually lower margin than those of other regions. Coupling this with higher selling charges and 9-10% build cost inflation, the group's operating margins have fallen. As a result, there's been a pause on recruitment as well as significantly reduced land approvals as the group aims to better manage its working capital through the storm that lies ahead.

Looking beyond the current turmoil, there are some bright spots.

On the balance sheet side, a net cash position of around £600m gives some options. It helps underpin the prospective 5% dividend yield and also leaves room to complete the remaining £45m of the current share buyback program. But remember, payouts to shareholders are variable and can't be guaranteed.

Ultimately, housebuilders are cyclical beasts. Their fortunes tend to expand and contract in line with the economy. Recession fears and widespread borrowing uncertainty are likely to remain challenges for the sector. Barratt's in a resilient financial position, so we're not looking at an existential catastrophe. Thanks to an uptick in sales rates, we've seen some of the pessimism around housebuilders be unwound, and Barratt's valuation has rebounded strongly year-to-date. There are no guarantees this will continue and the group remains vulnerable to any pause or reversal of the improved sales activity.

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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 3rd May 2023