Barratt Redrow maintains guidance despite challenges

Barratt Redrow (LSE:BTRW) is adapting its strategy given a challenging wider backdrop, continuing to move the levers within its control to protect its profitability and financial strength.

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While the effects of the US/Iran conflict are currently having a limited impact on trading, the effects on build cost inflation could well wash through in the next financial year. At the same time, the situation has all but obliterated the possibility of interest rate cuts, which has kept mortgage rates at higher levels, further squeezing consumer affordability.

For its part, these additional constraints have led to an even more disciplined approach to buying land. In its update for the third-quarter to 29 March, the company now estimates that it will purchase between 7,000 and 9,000 plots this year, as opposed to its previous guidance of between 10,000 and 12,000 at a cost of £700 million to £800 million, previously estimated between £800 million and £900 million.

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However, this has a positive side effect on the expected level of net cash at the end of this year, now guided as a range of £550 million and £650 million, versus the previous £400 million to £500 million. The trading situation is also being helped along by the £100 million projected cost synergies from the Redrow acquisition being on track, with £20 million achieved last year, £50 million likely this year and the £30 million balance following next year.

This also provides additional insurance for its shareholder returns, where its £100 million share buyback programme is ongoing. In addition, and despite previously halving the dividend, the current yield of 6.6% is a clear invitation to income-seeking investors, even though a proportion of the increased yield is a natural result of a lower share price.

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In the meantime, net private reservation rates for this period grew by 3.2%, although the remainder of the vital Spring selling season has yet to be measured. Nonetheless, with a level of homes 94% already sold, the value of the forward order book has spiked by 12.8% to £3.53 billion. 

The group has reiterated guidance for the full year, both in terms of adjusted pre-tax profit as well as completions to fall in a range of 17,200 to 17,800 homes. Even so, adjusted margin could remain under pressure as the currently lower level of build cost inflation and sales incentives continue to erode some of the group’s profitability.

Seen through the prism of the long term, there are any number of positive building blocks which should serve the sector, and in turn Barratts, well. There remains a supply imbalance for homes in the UK which will ensure ongoing demand, the government is looking to ease planning regulations and the at some point the estimated trajectory for interest rates will be revised downwards, which should also encourage new buyers. 

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However, in the current environment, a significant rerating of the sector is difficult to envisage, which would inevitably lead to there being a lid on share price appreciation. The shares have fallen by 38% over the last year, very much missing out on the broader revival whereby the wider FTSE100 rose by 29% over that period, and by 66% over the last five years. 

Of course, this leaves an undemanding valuation and the initial share price reaction to the update suggests some underlying support. It seems that investors retain a conviction to look through the more immediate challenges and concentrate on the possibilities of a recovery for the economic cycle, with the market consensus of the shares as a strong buy very much reflecting the group’s prospects as a longer-term play.