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Barratt Developments rises as it predicts record profits this year

Last updated: 05:50 11 Jul 2018 EDT, First published: 04:01 11 Jul 2018 EDT

Barratt
Barratt started the new year with a 'healthy forward order book and strong cash position'

Housebuilder Barratt Developments PLC (LON:BDEV) revealed on Wednesday that it expects record profits this year after it completed more homes and achieved higher average selling prices.

In a trading update, the company said profit before tax for the year to 30 June 2018 is anticipated to reach £835mln, compared to £765.1mln last year, boosted by a strong end to the year. The consensus forecast in the City prior to this morning's trading statement was for profit before tax (PBT) of £812mln.

Total housing completions, including joint ventures, rose to 17,579 – the highest level in a decade– from 17,395 last year.

The average selling price of homes increased 5% to £289,000.

Shares edged up 0.8% to 486p in morning trading.

Central London housing market recovers

The company said it has seen better-than-expected year-end trading in Central London, recovering from a widely-reported slowdown in the market.

Overall strong trading at the end of the year, particularly the improvement that was seen in Central London, led to an increase in the group’s net cash position that was higher than expected.

READ: Barratt Developments rolling in more cash than it expected

At the end of the period, it had a net cash balance of £790mln, compared £723.7mln last year. Shore Capital noted that this was materially higher than guidance of £550mln given in May and suggested that the discrepancy was so large it was most likely largely due to timing differences.

Forward sales, including joint ventures, stood at 10,155 plots at a value of £2.18bn. Last year the group had forward sales of 9,762 plots work £2.14bn.

“We begin the new financial year with a healthy forward order book, a strong cash position and a continued focus on delivery of operational improvements across our business,” said chief executive David Thomas.

Dividend yield 'unsightly', says analyst

Barratt Developments intends to pay an ordinary dividend based on 2.5 times dividend cover. It also plans to pay special dividends of £175mln in November 2018 and 2019, as previously announced.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the share price is around 30% lower than its peak in the second half of last year, meaning its forecast dividend yield is an "unsightly" 9%, which "offers some considerable compensation for the risks but also hints at some pretty negative sentiment towards the sector".

The share price decline reflects a more uncertain outlook for the UK housebuilders amid Brexit negotiations, Khalaf said. 

"It’s been a bumper year for Barratt, but cooling conditions in the property market mean the path ahead looks more challenging than it has done for some time," he added. 

"House price growth is moderating, and interest rates look like they might be going up soon too."

Shore Capital, meanwhile, is considering abandoning its bearish position on Barratt after the stock’s fall from a peak of just below 700p in October to around 490p now, compared to the broker’s fair value estimate of 520p.

Shore still not sure about the threat to margins​

“The tone of this statement is likely to revitalise the bulls of the stock/sector in the near term at least and could drive the shares back up through the rest of the summer,” it predicted.

“The tone of the statement feel more positive than the more cautious messages we have seen from elsewhere in the sector recently and beating consensus on PBT and cash could paint a very positive picture; however, one thing that suggests that the underlying position may be less robust is the comment on the sales from the developments in Central London. Here the board had suggested that the schemes would drip out sales over the next two financial years but there has been a strong surge in sales. This does raise the question of whether there has been a bulk sale or a drive to surrender some margin accelerate the exit from this market,” the broker said.

“This is underscored by the forward sales position being down in the core business (by 2%) and in the JV [joint venture] line by 32%: we have before seen Barratt press down harder on the accelerator when in 2016 sales from the JVs were realised earlier than planned. The statement looks to suggest that the stronger than expected performance is due to the early realisation of benefits from the various programmes aiming to push up the gross margins but, to us, the impact looks to be too much and too soon for this to be the reason,” Shore added, as it said it remained “cautious on the outlook at a market level”, with prices weakening across the market.

Shore said Barratt remains more vulnerable to price deflation than most of its peer because its margins are much lower. Shore calculates that every one percentage point (i.e. 100 basis points) cuts 100 basis points from Barratt’s margin.

Shares in Barratt were up 2% in morning trade.

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