Barratt Developments plc (BDEV) Ordinary 10p
HL comment (16 October 2019)
First quarter completions rose 14% year-on-year, although average prices fell slightly, as the proportion of affordable houses increased. The group suggested it continues to make progress on margins.
The shares fell 2% in early trading, in a market where Brexit sensitive stocks proved unpopular.
Conditions have been favourable for housebuilders these last few years. Interest rates are still low by historical standards, which supports mortgage affordability. Meanwhile, the UK's ongoing housing shortage continues to stoke the fires of demand. The icing on the cake is Help to Buy, which is biased in favour of new builds.
The problem is, these conditions are unlikely to last forever. Brexit worries have started to impact the sector, with housebuilder shares going up and down like a yoyo recently. House buyer sentiment is wavering, and build cost inflation is creeping in. Added to that, the government's announced Help to Buy will end in 2023, which has the potential to whip the rug from under the feet of a large number of Barrett's buyers.
The potential for future volatility is behind Barratt's plan to distribute future shareholder returns through a combination of buybacks and special dividends. When shares fall, investors are often better served through buybacks as opposed to special dividends, so we think this flexible approach is the right one, even if it means the bumper 6.7% dividend yield dries up.
Management confidence will be boosted by a strong operational performance to date, with improving client satisfaction and increasing margins. BDEV's been using pre-fab structures for a number of homes, which not only take less time to construct, but are cheaper too.
Barratt has taken the decision to lower exposure to the subdued central London property market, where economic headwinds are dulling performance. While that's contributing to lower average selling prices, it's a sensible move in our view and should help insulate margins. Barratt is also keen to flag stronger financial foundations. In marked contrast to the last housing crisis the balance sheet is packed with net cash, before accounting for land creditors - and even here borrowing is falling.
All-in-all, Barratt is doing well with the options available. But the fate of the wider housing market is outside its control, and if the housing market malaise spreads beyond London, Barratt will struggle.
Headline sales rates were flat year-on-year at 0.72 reservations per outlet per week. However, last year's numbers were boosted by two bespoke building contracts, without which sales rates for the period would have been 0.69.
The group opened fewer new outlets during the quarter - 26 compared to 53 last year. The overall number of active outlets increased 2.5% to 374.
The group continues to target a minimum 23% gross margin from new land acquisitions, and expects to purchase between 18,000-22,000 new plots during the year. New housing styles are now in place in 74% of active outlets, which are expected to support margins going forwards.
Despite "economic and political uncertainty" Barratt remains focussed on growing wholly owned home completions by 3-5% a year, with a return on capital employed (ROCE) of at least 25% over the medium term.
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.
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