ii view: Barratt Developments prepared for weaker demand

This FTSE 100 housebuilder halved in value during 2022 but the shares are up over 15% in 2023. We assess prospects. 

First-half results to 31 December

• Revenue up 23.9% to £2.78 billion
• Adjusted pre-tax profit up 15.9% to £521 million
• Net cash down 14.4% to £969 million
• Interim dividend down 8.9% to 10.2p per share
• Ongoing £200 million share buyback programme

Chief Executive David Thomas said:

"We have delivered a strong operating performance for the six months to 31 December 2022. This was possible because of our significant forward order book at 30 June 2022 and the tremendous efforts of our employees, sub-contractors and supply chain partners.

“However, the economic backdrop has clearly been challenging and consumer confidence weakened significantly during the half, which meant we saw lower reservation rates for future sales - particularly in the second quarter. Whilst we have seen some early signs of improvement in current trading during January, we will need to see continued momentum over the coming months before we can be confident that these challenging trading conditions are easing.”

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ii round-up:

Housebuilder Barratt Developments (LSE:BDEV) builds nationally, employing over 6,000 people. 

Approximately two-thirds of its builds are three or four bed houses. Its brands are Barratt Homes, David Wilson and Barratt London. Its commercial business Wilson Bowden focuses on retail, leisure, office, industrial and mixed-use schemes.

For a round-up of these latest results announced on 8 February, please click here.

ii view:

The FTSE 100 constituent has been building houses for more than 60 years. Today it constructs both private and affordable housing, delivering 17,908 during its last financial year, up from 17,243 in the prior year. That's also above the 17,856 homes built in the pre-pandemic year 2019. Barratt expects to complete between 16,500 and 17,000 homes this current year to the end of June, including 750 via joint ventures. It currently competes with rival Persimmon (LSE:PSN) as the UK’s biggest housebuilder by stock market value, followed by Berkeley Group Holdings (The) (LSE:BKG) then Taylor Wimpey (LSE:TW.). 

For investors, the uncertain economic outlook including potential further interest rate rises and a cost-of-living crisis cannot be overlooked. Interest rate rises and the UK’s failed mini-budget last autumn caused reduced demand, with planned build completions down from the prior year and a reduction in the dividend payment signalling management caution on the outlook. Elevated inflation is pushing up build costs while stretched government finances may limit the company's ability to assist the sector as it has done many times before.   

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On the upside, signs that inflation may have already peaked are fuelling hopes that interest rates may not rise much further. Management has also taken action to adjust its cost base to reflect reduced activity levels and conserve cash via a reduction in the dividend payment, while a forecast dividend yield in the region of 7% remains attractive. 

Cautious investors are likely to await more concrete evidence of recovery before backing the housebuilders, but the sector is highly cyclical and will respond quickly to signs that the UK economy is back on a secure footing and primed for growth.  

Positives: 

• Offers regional UK geographical diversity
• Attractive dividend yield (not guaranteed)

Negatives:

• Uncertain economic outlook
• Elevated build costs

The average rating of stock market analysts:

Buy