Interactive Investor

Barratt Developments justifies recent share price recovery

14th October 2020 09:38

Richard Hunter from interactive investor


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Our head of markets digs deep into first-quarter results from the FTSE 100 housebuilder.

Barratts (LSE:BDEV) continues to capitalise on those factors within its control as economic clouds darken.

The start to the company’s new year is extremely positive compared to the corresponding period last year. Net private reservations rose by 20.8% in the period from 1 July to 11 October, home completions by 24% and total forward sales are ahead by 17%. 

At the same time, these numbers have been underpinned by house prices which have held firm, and the company’s outlook includes the growth of wholly owned completions to between 14,500 and 15,000 homes this financial year.

The firm’s financial position also leaves it with a strong defence against the challenges which may well be on the way. Apart from its net cash position of £570 million, a noticeable improvement since the full-year results just last month when the figure stood at £308 million, the undrawn credit facility in the background of £700 million provides strong further support if required.

However, it continues to be the factors outside of the company’s control which bear down on prospects. The dilution of Help to Buy next year could expose housebuilders’ reliance on the programme to date, where Barratts has seen 51% of its new reservations using the scheme, of which 74% were first-time buyers. The availability of high loan to value mortgages has suffered post-pandemic, while the general outlook for the UK economy is currently bleak, with stuttering Brexit negotiations compounding the effects already being suffered as a result of Covid-19.

More positively, the housebuilders are in better shape than was the case following the previous financial crisis, and some tailwinds remain, such as the current stamp duty holiday, generally good mortgage availability and the general shortage of housing in the UK.

The overarching uncertainty on the outlook for the economy has, however, left its mark on the share price performance. Despite a 49% hike since the March low, the shares remain down by 27% in the year to date. Over the last year, the shares have declined by 17%, in line with the performance of the wider FTSE 100 index.

Even so, Barratts is perceived to be strongly positioned to weather the forthcoming challenges and in the meantime to be able to drive the business forward as circumstances allow. The market consensus of the shares as a strong buy reflects this optimism, with Barratts remaining the preferred play in a difficult sector.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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