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Barratt - completions slow and Redrow merger announced

Barratt Developments' reported half-year revenue of £1.9bn, down 34% on last year.

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Barratt Developments' reported half-year revenue of £1.9bn, down 34% on last year.

Underlying pre-tax profit fell 69.9% to £157.1mn, largely due to a 28.5% fall in the number houses sold. Operating margins fell from 18.4% to 8.4% as cost inflation remained, and house prices continued to soften. The order book moved lower, down from £2.5bn to £2.1bn.

Net cash of £753.4mn has moved down £215.7mn since 31 December 2022. There was a free cash outflow of £78.6mn due to lower operating cash flow, the prior year saw an inflow of £184.4mn.

Barratt has announced it's agreed an all-share offer for the combination of Barratt and Redrow. The deal values Redrow at more than £2.5 billion, a 27.2% premium.

The current trading outlook remains uncertain, but there has been an encouraging uplift in reservation activity since the start of January.

The Board has declared an interim dividend of 4.4 pence per share, down 57% on last year.

The shares fell 6.3% following the announcement.

View the latest Barratt Developments share price and how to deal

Our view

Barratt's half year results came with a big surprise. But before we get to that, results were lacklustre. Buyers continue to face real challenges around mortgage affordability and it's impacting performance.

But there is a glimmer if light. Reservation rates and buyer sentiment appear to be improving. Helped by the expectation of lower interest rates and the introduction of better mortgage deals, management are upbeat.

This optimism comes with warnings. Fewer homes being sold and at reduced prices have hit the group's top line. High, but moderating cost inflation and incentives, used to boost sales have also contributed to reduced margins, which are expected to remain under pressure this year.

While a slowed market could have been predicted, the acquisition of Redrow came as a shock. The deal values Redrow at more than £2.5 billion, a 27% premium that will effectively be paid by Barratt. The Redrow brand focuses on larger, higher quality homes for more affluent buyers, which Barratt currently serve through their David Wilson Homes brand.

The combined group expects annual cost savings of around £90mn, with synergies across office space, staff and geographies. But while the deal is an immediate bump for Redrow shareholders, benefits will take a couple of years to come through for the new group.

If build cost inflation cools to 5% as guidance suggests and cost synergies come as expected, there could be welcome relief to margins over the medium term. But, with any merger/acquisition, there will be challenges.

On the balance sheet side, structuring the deal as a share offer means the combined business will benefit from Barratt and Redrow's strong aggregate net cash position of £874mn. That gives flexibility to cope with a challenging market.

Ultimately, housebuilders are cyclical beasts. Their fortunes tend to expand and contract in line with the economy. And with tougher borrowing conditions 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.

We see merit in the Redrow deal, the combined entity will have a war chest at its disposal and a strong landbank to unleash when the market recovers. Of course, there's no guarantee the deal goes ahead - it still requires shareholder and regulatory approval. In the meantime, Barratt's valuation remains depressed, a reflection of the tricky market conditions.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 7th February 2024