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Barratt Developments - revenue up but margins get squeezed

Barratt Development's half-year revenue rose from 2.2bn to 2.8bn pounds.

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Barratt Developments' half-year revenue rose from £2.2bn to £2.8bn. This comes as total completions in the first half increased from 8,067 to 8,626, reflecting order book strength carried into its new financial year.

Underlying operating profit rose 13.8%, but operating margins fell 1.6% as higher admin costs and a change in selling mix had negative impacts.

Average selling prices rose 14.6% to £330k, reflecting both underlying house price inflation and an increased proportion of London deliveries. Net private reservations per active outlet per week fell to 0.44, down from 0.79 in the same period last year.

Net cash fell from £1.1bn to £965m. Free cash flow increased from £29.4m to £184.4m

The group announced an interim dividend of 10.2p, down from 11.2p last year. The remaining £100m of share buybacks will also recommence, expected to be completed by the end of June.

The outlook for the second half of the year remains "uncertain". Completions for the full year are expected to be between 16,500 and 17,000.

The shares were broadly flat following the announcement.

View the latest Barratt Developments share price and how to deal

Our View

Barratt Developments is continuing to show cracks in the housing market, albeit January did show some signs that it may not be as bad as first feared. But demand for new builds is cooling, reflected in the substantially lower net reservation rates which are down roughly 44% over the last year.

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. This is reflected in Barratt's total order book value, which has fallen from £3.8bn to £2.5bn.

There's 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, an enviable net cash position in excess of £950m gives some options. This includes returning some cash to shareholders with £100m in share buybacks expected to be completed by the end of June.

We also note the group's reduced its dividend cover policy, which is effectively a loosening of the purse-strings. This helps prop up the 6% 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. Remember, dividends are variable and not guaranteed.

Ultimately, 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's in a resilient financial position, so we're not looking at an existential catastrophe, but ups and downs are to be expected in the current environment.

The current valuation could prove to be an attractive entry point, but only for those prepared to weather the storm.

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: 8th February 2023