Interactive Investor

Optimistic Barratt Developments bullish on profits

14th July 2021 08:45

Richard Hunter from interactive investor

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This annual update is encouraging and buyers are sniffing around the housebuilder's shares again.

Barratt Developments (LSE:BDEV) has echoed the positive noises coming from the housing sector with a robust period of trading.

In particular, net private reservations per week have now recovered and are exceeding pre-pandemic levels, with forward sales ahead by 25% compared to 2019. The previously flagged difficulty of recovering pre-pandemic housing completions has not yet been overcome, although a stronger number than the one the company had anticipated has left the figure just 3.4% shy of a return to normality.

Total average selling prices have also risen to £289,000 from £280,000 last year, given underlying inflation effects, and the general effect of the strength in trading means that full-year pre-tax profit is now expected to come in at the top end of market expectations.

At the same time, the company is not resting on its laurels in keeping the momentum going, with a land spend for the year of £877 million, subject to its own testing requirements of cost and likely profit to be achieved. The financial position overall has also markedly improved, with net cash now standing at £1.3 billion (£308 million in 2020 and £766 million in 2019), with an additional unused revolving credit facility of £700 million providing further support if required.

The previously announced return to a dividend payment was a welcome development, although the current yield of 1.1% is anaemic by historical standards. Even so, a projected yield of around 4% should be sufficient in restoring what has been an attractive factor of the housebuilders over recent years, namely a punchy dividend income in addition to capital return.

There are some elements of caution around the sector, despite the company’s upbeat outlook. The fallout from the withdrawal of government aid schemes is yet to be felt in terms of UK unemployment and consumer confidence, while another strong inflation reading will also remind investors that interest rate rises remain on the horizon, although not an imminent threat.

At the same time, there will be have been a temporary boost within the numbers given the likes of the stamp duty holiday and the Help to Buy scheme move, and the cost of safety improvements to legacy properties is an ongoing factor, amounting to £81 million over the year.

Overall, however, the clouds are clearing and Barratts is well positioned into the new financial year. The share price has also seen the effects of an improving trading display and has risen by 29% over the last year, as compared to a hike of 15% for the wider FTSE100 index. With strong demand and a promising outlook in evidence, market consensus also remains positive on prospects, coming in at a 'strong buy'.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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