Barratt Developments has announced the purchase of land promotor Gladman Developments Limited in an all-cash deal worth £250m.
Gladman's will operate as a stand-alone business, with a portfolio currently comprising 406 potential sites with an average of 242 plots per site. It's expected to deliver an additional 500 home completions per year from 2025.
Steven Boyes, COO and Deputy CEO at Barratt Developments, said: ''Gladman's strong credentials in identifying attractive land and promoting sites through the planning process will be an important addition to the Group.''
The shares were broadly flat following the announcement.
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Our View
Barratt's managed to wedge itself into a good position as lockdown-fuelled demand winds down and supply chain issues loom. Despite these headwinds, trading's continued as expected.
Even with the end of the stamp duty holiday, coupled with a shift in the Help to Buy scheme, the housing market continues to run hot. Forward sales are almost 20% ahead of pre-pandemic levels, and prices continue to climb.
Barratt itself is well on the way to recovery too. Completions are ahead of 2019 levels, and higher prices mean revenues are already back in growth territory. Strip out ''exceptionals'' related to legacy properties and repayment of coronavirus grants, and profits are back above pre-pandemic levels too.
Those ''exceptionals'' are a lingering bugbear, having proven anything but exceptional recently as the group spends tens of millions every year on rectifying past mistakes. Those corrections cost the group £81.5m in 2021 and are expected to total £40m next year. We hope to see them fall from there.
Still, getting back onto a firm footing is no mean achievement given the economic headwinds the group faced last year, and others that are only just emerging. Build cost inflation is running at 4-5%, and while that's being offset by higher house prices at the moment it's a trend that's unlikely to continue forever. At some point the number of buyers at higher prices will dry up and the group will have to rely on increased sales rather than higher prices to drive profits higher.
We see that as the key factor driving Barratt's long-term goal of 20,000 completions a year. The group approved the purchase of 18,067 plots last year at a cost of £876.8m. The recent purchase of Gladman's is another step in the right direction, not only should it directly deliver around 500 new homes a year from 2025 on, but it'll help the group source strategic land.
The group's targeting gross margins, profits after build costs but before central and financial expenses, of 23% from the new land it buys - which if it can be sustained at the 20,000 properties a year rate would imply a significant improvement in operating profits.
Accounting for the recent acquisition, plus money the group has already committed to pay for land, net cash stands at £409.1m. That's an enviable position to be in and gives the group some options. Further acquisitions could be on the cards or the group could return some cash to shareholders with a share buyback or special dividend. Either way, it helps prop up the 6.9% prospective dividend yield, although no dividend is ever guaranteed.
Ultimately, Barratt has come out of the crisis in good health, and we think the long-term fundamentals of the UK housing market remain intact. While sharp rises in inflation and interest rates have the potential to upset the entire market, for those prepared to accept the external risks, we think Barratt is a strong name in its sector.
Barratt Developments key facts
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AGM Trading Statement (13 October 2021)
Barratt has said it's on track to meet the full year and medium-term targets laid out in last year's full year results. It highlighted that net private reservation rates fell 2.3%, compared to 2020, reflecting the non-repeat of pent up lockdown demand and increased Help to Buy (H2B) reservations seen last year.
The group said it hasn't seen any "significant disruption" relating to global supply chain problems. Build cost inflation is still expected to be around 4-5% for the full year.
Compared to pre-pandemic levels, the net private reservation rate rose 18.1%. Net private reservations per active outlet per average week declined from 0.87 to 0.85. So far this year, 21% of private reservations are using Help to Buy, compared to 51% last year.
The group launched 27 new developments, as expected, and plans to grow the number of sales outlets by around 3% this year.
Barratt's private homes are now 71% forward sold, with a total of 15,393 homes - including joint ventures - worth £3.9bn presold. That's up from 15,135 homes worth £3.6bn at the same point last year.
Private average house prices rose to £344.3k from £331.4k, as underlying house price inflation outweighed a modest decrease in the proportion of larger family homes sold and unfavourable mix changes in London.
The group's approved the purchase of 3,735 plots across 15 sites and expects to add between 18,000 and 20,000 additional plots this year.
The group expects to grow completions by 17,000 - 18,000 homes in the current financial year.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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