Barratt Developments plc (BDEV) Ordinary 10p
HL comment (8 January 2021)
During the first half, Barratt completed on 9,077 homes, a 9.2% increase from same period last year. The group's sales rate also rose to 0.77 per outlet per week from 0.69 per outlet per week in 2019.
Barratt plans to continue operating both construction sites and sales offices throughout the new lockdown, with only its Welsh sales office being forced to close.
The board plans to resume dividend payments, with the interim dividend to be announced on 4 February alongside interim results.
The shares were up 3.3% following the announcement.
The news coming from the housebuilders has been better than we expected.
Crucially, house prices appear to be holding up well, despite the lack of higher loan to value mortgages on offer. Nationwide's house price index is showing continued strength, and Barratt recently reported stable pricing and an impressive sales rate.
Barratt adopted a number of measures to preserve cash during the crisis, including cancelling the dividend. Although painful upfront, it's been good for the group's cash position, which surged to £1.1bn in the first half. While that sounds lofty, part of the increase can be attributed to a pause in new projects due to the pandemic. Nonetheless management has announced plans for the resumption of dividend payments, which are expected to equal 40% of profits over the year.
There are also reasons to be hopeful longer term. The fundamentals of the UK housing market are still attractive. Low interest rates are supporting mortgage affordability and an ongoing housing shortage underpins demand.
Having said that, the economy could yet slide into a prolonged recession, and if house prices fall the builders could struggle to turn a profit on the land they've already purchased. While we've been impressed by the way these groups have handled the lockdown, it's a risk to be aware of. Housebuilders are certainly not a one-way bet.
It doesn't help that the current form of Help to Buy is due to come to an end in 2021. The scheme was used by 51% of Barratt buyers at the last count. Barratt wants the government to consider further help for first time buyers, and the Chancellor is likely to want to support house prices. There are a lot of demands on the public purse at the moment though, and this may not be a priority.
The group's done pretty much all it can in term of self-help. Efforts to preserve cash, reduce costs and ensure it can operate in lockdown are commendable. Now, all eyes will be on the housing market and whether buyers remain eager in the wake of a third lockdown. Barratt has done well to weather this storm so far, but we're not out of the woods yet.
Barratt Developments key facts
- Forward P/E ratio: 12.2
- 10 year average forward P/E ratio: 10.6
- Prospective yield: 3.6%
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.
The lockdowns during the first half of the year contributed to an 8.1% decline in active outlets from the previous year. Pent-up demand coupled with the stamp duty holiday and the end of Help to Buy mean the group is entering the third quarter with reduced product availability.
Barratt bought 5,635 new plots on 35 sites between August and January, and intends to continue with its land purchasing strategy to develop a land bank of around 4.5 years. Barratt's forward orderbook accounts for roughly 90% (13,588 properties valued at £3.2bn) of its expected completions for 2021.
The group's total average selling price rose 1.1% and its private average selling price showed a 2.2% increase to £319,000.
Barratt had £1.1bn in net cash at the end of the period, a marked increase from the £308.2m that the firm had on-hand at the end of June. That reflects a decline in work in progress, although investment is expected to increase in the second half.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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