Barratt Developments (BDEV) Delivers Robust Financials Despite Macro Headwinds

Britain's biggest housebuilder Barratt Developments (BDEV) in the latest trading update reported strong performance and said it expected annual profits to be slightly above its previous expectations. The company said that the margins were improving, bucking a trend of weak updates from UK housebuilders and suggesting it was riding out Brexit-generated tensions in the housing market. The housebuilder reported that it had managed to keep a lid on costs and made "good progress" on driving margin improvements. It also said that good progress was being made on medium-term targets.

The group reported that trading since the beginning of the year has been strong with customer demand for good-quality new houses on the back of a stable underlying market. The net private reservations per active outlet per average week for the period remained strong at 0.79, in comparison to 0.80 in 2018. While the new developments launched in the period increased to 47, the number of outlets operated remained constant at 388. Company's volume growth aspirations would be supported by its plan to approve between 18,000-22,000 plots for purchase per annum in each of the next three years. Despite build cost inflation which is expected to be 3-4% for FY19, the company plans to improve its cost profile by making refinements to its new housing ranges.

Barratt, which operates through its Barratt Homes, David Wilson Homes and Barratt London brands, reported total forward sales (including JVs) for the year so far were up 2.4 per cent on the prior year comparable at a value of £3,365.1m, equating to 14,181 units. In February, the company proposed paying special dividends worth £175m in November 2019 and November 2020, which was in addition to its dividend policy to distribute a dividend, with a dividend-coverage ratio of 2.5x. Year-end net cash is expected to be £600m - £650m, indicating generation of cash remains strong.

The outlook for the full year is modestly above the Board's previous expectations, and the company continues to forecast volume growth to fall towards the lower end of its medium-term target range in the current financial year. Despite uncertainties in the macro environment due to Brexit, the company is in a strong position, with a healthy forward sales position and a strong balance sheet.

The fundamentals of the housing market remain strong, with a positive lending environment, strong Government support for the sector and a long-term undersupply of new homes. Demand for new homes has seen push specifically from the Help to Buy scheme offered by the government. In contrast to the company’s peers Taylor Wimpey and Persimmon, it expects to deliver a modest improvement to the Board’s previous expectations. While the country’s third-largest Taylor Wimpey had warned on margins and flagged cost pressures, second-largest housebuilder Persimmon had reported a fall in orders so far this year.

Share Price Commentary

 Daily Chart as at May-10-19, before the market closed (Source: Thomson Reuters)Â

On 10th May 2019, at the time of writing (before the market closed, GMT 09:10 am), BDEV shares were trading at GBX 603.20, up by 0.53 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 628.07/GBX 430.00. The company’s stock beta was 0.67, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £6.10 billion with a dividend yield of 4.58 per cent.


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