Interactive Investor

ii view: housebuilder Barratt Developments takes corrective action

18th July 2023 15:56

by Keith Bowman from interactive investor

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Attempting to tailor completions to reduced demand, conserving cash and hopeful of easing build costs. We assess prospects. 

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Full-year trading update to 30 June

  • Home completions down 4% to 17,206
  • Average selling price of £320,000, up from last year’s £300,200
  • Forward sales of £2.22 billion (8,995 homes), down from £3.62 billion (13,579 homes) this time last year

Guidance:

  • Expects full-year adjusted profit to meet City forecasts

Chief Executive David Thomas said:

"During a year of economic and political uncertainty, we have delivered a strong operational and financial performance, while maintaining our industry-leading quality, customer service and sustainability credentials.

Whilst the trading backdrop has become more challenging in recent months, with many of our customers facing significant cost of living pressures, we have responded decisively - increasing our reservations into the private rental sector, using incentives for customers in a disciplined way, and flexing our build activity, land-buying and operating costs to reflect market conditions.

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 this latest trading update announced on 13 July, 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 17,200 homes in the past year, down from 17,908 the year before and below the 17,856 homes built in 2019, before the pandemic. Competitors include Persimmon (LSE:PSN), Taylor Wimpey (LSE:TW.), and Bellway (LSE:BWY)

For investors, the tough economic backdrop, including likely further interest rate rises, cannot be forgotten, and considerably higher mortgage costs are reducing customer demand. Previous government industry support schemes such as the ‘Help to Buy’ scheme have been withdrawn, build costs remain elevated, while the last interim dividend payment earlier this year was cut by 9%, signalling management caution.  

On the upside, management actions to adjust to this more difficult environment include reducing completions in line with reduced demand, and trimming the dividend to conserve cash. Management hopes that build inflation will ease, while a forecast dividend yield of over 7% (not guaranteed) remains attractive. 

For now, investors who believe we're at a cyclical low point will appreciate Barratt's proven ability to recover from a downturn, often sooner and quicker than other sectors. Alternatively, some may wish to see whether things get worse this year before taking action.

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

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