ii view: Barratt Developments fails to reassure investors

Housebuilder Barratt starts the financial year well, but points to low range volume growth. 

Trading update for the 15 weeks to 13 October 2019

• Sales rate unchanged at 0.72 net private reservations per active outlet per average week
• Average active sites up 2.5% to 374
• Home completions up 14% to 3,252
• Total forward sales of £3.07 billion, down from £3.14 billion

Chief executive David Thomas said:

"We have started our new financial year well, with a good sales rate and a healthy forward order book. As the only major housebuilder to be awarded a 5 Star rating for customer satisfaction for ten years in a row, we continue to lead the industry in quality and customer service.

"Whilst there is economic and political uncertainty, we continue to be disciplined and have a strong balance sheet and cash position which we believe provide us with the resilience and flexibility to react to potential changes in the operating environment in FY20 and beyond. We maintain our focus on the delivery of operational improvements across our business, and our commitment to deliver the highest quality homes across the country."

ii round-up:

Major UK housebuilder Barratt Developments (LSE:BDEV) failed to reassure investors in its latest trading update. 

Despite highlighting 'good' customer demand across the country, accompanying outlook comments pointed to volume growth at the lower end of management's medium-term 3% to 5% target range. 

The value of total forward sales had declined by just over 2% to £3.07 billion, despite a marginal increase in actual houses sold, with sales per active outlet remaining unchanged. 

The share price fell by just over 2% in early UK stock market trading. 

More favourably, the rollout of its new product range had remained ongoing, providing management with greater flexibility to replan sites to suit market conditions and consumer demands, while the acquisition of land at a minimum gross margin of 23% had continued. 

ii view:

A no-deal Brexit and the Bank of England's estimate of a possible 30% fall in house prices top the list of investor concerns. The Halifax's latest house price survey pointing to the slowest pace of annual house price growth in six years is also weighing on investor sentiment. 

However, away from factors outside of its control, Barratt remains well managed. A 5 Star rating for customer satisfaction leaves it without the difficulties suffered by rival Persimmon (LSE:PSN), while the group continues to underline its strong balance sheet, cash position and focus on shareholder returns. 

For investors, shareholder returns across the housebuilding sector remain a core attraction. A one-year forecast dividend yield of nearly 7% is attractive in the current low interest rate environment, while a forward price/earnings ratio of under 10 is hardly demanding. That said, until the uncertainty around Brexit is removed, and amid concerns around vulnerability this late in the economic cycle, investor caution appears justified.

Positives: 

• Offers regional UK geographical diversity
• Focus on build quality and customer service compares well to some rivals
• Returning surplus cash to shareholders

Negatives:

• Brexit uncertainty overhangs the housing market
• Help to Buy scheme due to end in 2023
• Build costs have been rising

The average rating of stock market analysts:

Buy