Results reflect Barratt Redrow's Budget hangover

Along with its peers, Barratt Redrow (LSE:BTRW) suffered an extended period of uncertainty from buyers ahead of the Budget, although once this hurdle was overcome, many customers then decided to complete before the end of the calendar year.

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Even so, the currently unstable political environment continues to weigh on consumer confidence, while affordability concerns remain in sharp focus particularly for first-time buyers. That said, mortgage availability constraints are easing and the possibility of interest rate cuts later this year could help spark the sector as a whole into life.

Any such relief is for the future, however, and the Budget hangover is plain to see. While revenues grew by 10.5% in the 26 weeks ended 28 December to £2.63 billion, adjusted operating profit dipped by 0.3% to £210.2 million and adjusted pre-tax profit by 13.6% to £199.9 million. Adjusted margin of 8% compared to 8.9% in the corresponding period as build cost inflation and sales incentives continued to erode some of the group’s profitability. 

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Dividend cuts are never well-received and despite being a marginal downgrade, there could be some disappointment as a result. Having previously halved its dividend payment, Barratts has reduced the interim payment from 5.5p to 5p, reducing the yield to 4.4%, which nonetheless remains attractive. Previous payments, alongside the share buyback programme and increased investment work in progress costs has left net cash at £173.9 million, down from a previous level of £458.9 million, although this buffer remains comfortable.

There are also some positives which Barratts will hope are leading to a long-awaited inflection point. Home completions rose by 4.7% to 7444, the underlying private reservation rate ticked slightly higher to 0.55 from 0.54 (and is currently running at 0.59), while the target of £100 million of cost synergies from the Redrow deal are on track as the merger nears full completion. 

The Return on Capital Employed also edged higher to 8.2% from 8.1%, while there will be some relief on the forward sales outlook. The forward order book stands at £3.41 billion, up from £3.35 billion, comprising 11168 homes compared to 10903 previously.

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The immediate outlook will largely depend on the imminent and vital Spring selling season, where any indications of recovery will be keenly sought. In the meantime, the group is maintaining its outlook for full-year housing completions in a range of 17,200 to 17,800, en route to its medium term target of 22,000 per annum. The adjusted pre-tax profit number also remains unchanged within a range of £558 million to £617 million.

Seen through the prism of the long term, there are any number of positive building blocks which should serve the sector, and in turn Barratts, 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. 

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However, a challenging growth outlook amid the economic backdrop will likely lead to limited growth in the year to come, and the dividend cut and contrast to a strong update from Bellway yesterday have weighed strongly on the share price at the open. The decline adds to a share price which had fallen by 13% over the last year, missing out on the broader revival whereby the wider FTSE100 rose by 18% over that period. 

It remains to be seen whether investors will retain a conviction to look through the more immediate challenges and concentrate on the possibilities of the longer term, as has been the case for some time. As such, there could be some pressure to come on a market consensus which has recently remained at a highly optimistic strong buy.