Barratt Redrow performance impressive in current climate

A detailed trading update in July removed the scope for any major shocks in this release, leading to investors placing more emphasis on the outlook.

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Seen through the prism of the long term, there are any number of positive building blocks which should serve the sector, and in turn Barratt Redrow (LSE:BTRW), 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 estimated trajectory for interest rates is downwards, which should also encourage new buyers.

At the same time, the group has renewed confidence in future prospects bolstered by the Redrow acquisition, such as providing access to the more affluent market in which Redrow tends to operate and that is now largely complete. Early synergies previously resulted in the group upping estimates for cost savings of £100 million by year three from a previous £90 million, and these savings are ahead of schedule with £69 million already completed. In addition, a combined land pipeline of over 92,000 plots and an intent to deliver around 22,000 homes per annum in the medium term remains in place, with complementary geographical footprints adding a further intriguing dimension to the deal.

However, nearer term there are warning signals which are to a large extent out of the group’s control. Consumer caution and affordability issues are a headwind for the sector, particularly given the possibility of more tax rises to come. The impending difficulties which the consumer will face, in part to the measures announced in the Budget let alone the one to come in November, could temper demand and indeed affordability, as the group is currently encountering in the affordable home sales segment.

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There is also a concerning trend within the group’s London market – as recently confirmed by Berkeley Group Holdings (The) (LSE:BKG) – that demand is currently weak, with fewer international and indeed domestic investor completions dragging down the group total by 7.8% to 16,565 homes in the period and below the group’s guided range of between 16,800 and 17,200.

More positively, net private weekly reservation rates rose by 16.4% to 0.64, with a comfortable current trading number of 0.55, while a strong forward order book of £3.14 billion across 10,350 homes provides visibility and has led to the group maintaining its completion range of between 17,200 and 17,800 homes for next year, en route to its medium-term target of 22,000, which is a strong platform.

The top-line numbers have been hard won and are impressive in the circumstances. Revenue rose by 33.8% to £5.58 billion, leading to an adjusted pre-tax profit of £591.6 million, up by 27% and ahead of the expected £582.6 million. In addition, the cash-generative nature of the business is also flowing through to shareholder returns, with a £100 million share buyback programme ongoing, which is intended to represent the beginning of an annual exercise.

In addition, the dividend (following a near-halving of the payment last June) still yields 4.7%, which is perfectly attractive by any standards. These measures come despite the decrease in net cash to £772 million from £868.5 million, partly due to the dividend payment but also reflecting further land investment and acquisition costs.

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More relief for the sector came in July with the announcement from the Competition and Markets Authority (CMA) that its concerns into housebuilding pricing would now be satisfied by a contribution of £100 million from seven UK housebuilders, of which Barratts will pay the containable sum of £29 million. More importantly, the judgement removes the sector overhang which the investigation had brought, although additional costs such as £92.6 million for legacy property charges remains a thorn in the side.

A challenging growth outlook amid the economic backdrop will likely lead to limited growth in the year to come, and the lack of any obvious catalysts has been a strong weight on the share price. Over the last year, the shares have missed out on any broader premier index revival, falling by 28% as compared to a gain of 11% for the wider FTSE 100.

Despite this pressure, investors are currently keen to look through the more immediate challenges to concentrate on the possibilities of the longer term, alongside an undemanding valuation, leading to a highly optimistic market consensus of the shares as a strong buy.