Barratt Developments plc (BDEV) Ordinary 10p
HL comment (25 March 2020)
Barratt Developments in the process of closing all sales centres, construction sites and offices in line with latest government COVID-19 requirements. The group has transitioned to home working.
The group has cancelled the interim dividend of 9.8p that was due to be paid on 11 May and will consider future dividends at full year results in September.
The shares rose 3.3% following the announcement.
Prior to the outbreak of the coronavirus, conditions were favourable for housebuilders. The story has since changed. A national lockdown and major economic uncertainty means moving house is being wiped off to-do lists, and construction may even grind to a halt.
The disruption means Barratt now faces the prospect of both falling demand and prices. Together this will have an immediate impact on revenues and profits, which will then eat into cash. In response the group's focussed on preserving as many pennies as it can. That's the right decision.
The group's adopted a number of measures, including cancelling the interim dividend, which although painful for shareholders in the shorter could mean survival in the long run.
To the group's credit its balance sheet is in much better health than the last housing crisis. Barratt has around £380m in cash and also has access to £700m undrawn credit.
The key question for both Barratt and its investors is 'how long'. If COVID-19 disruption is short-lived that could mean the UK can get back on track relatively quickly. However, the longer the disruption the greater the pressure on Barratt's cash resources. There's also risk of a sustained economic slowdown or recession, which could mean performance is subdued over a longer-term.
Crisis aside briefly, if the group manages to avoid permanent damage there are reasons to be hopeful for the future. The long term fundamentals of the UK housing market will still exist - low interest rates supporting mortgage affordability and an ongoing UK housing shortage underpinning demand. And Barratt's quality proposition is well placed to meet it.
In the meantime, the next few months are crucial for many UK businesses, housebuilders included. So we think Barratt's decision to focus more on immediate finances than forecasts is the right one. Investors should go into the next few months fully aware that it could get uglier before any signs of improvement.
Barratt has taken a number of measures to manage the groups cost base and cash flow including: suspending all land buying, stopping recruitment and postponing non-essential capital expenditure. In cancelling the interim dividend the group will save around £100m.
At as 20 March, Barratt had around £380m of cash and £700m undrawn credit.
Prior to the COVID-19 outbreak, the group said it had started 2020 well and trading was in line with expectations.
In the period to 22 March, Barratt completed 10,364 homes (2019: 9,437). Forward sales total 13,836 homes, at a value of £3.3bn.
Given the ongoing uncertainty, Barratt is unable to quantify the impact of COVID-19 on financial and trading performance at the moment and have suspended all existing financial guidance.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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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