Barratt Developments delivered 4,625 homes in the four months to the 1 May, up from 4,481 last year. In the financial year to date, completions are down from 13,588 to 12,692. As previously flagged, the decrease reflects a return to more normal demand patterns.
Build cost inflation continues to trend at around 6%, that's expected to be fully offset by roughly 7% higher sales prices, volume growth and cost savings.
Full year completions are expected between 18,000-18,250, which would equate to 4-6% growth.
The shares were up 1.5% following the announcement.
View the latest Barratt Developments share price and how to deal
Our View
We've already heard from some of Barratt's peers, and trading so far this year paints a similar picture. Demand's holding up despite the tapering of the Help to Buy scheme and end of the stamp duty holiday
Build cost inflation is running at over 6% 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 volumes 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 looks on track to add 18,000-20,000 new plots to the pipeline this year. Plus, 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.
Net cash stands at an enviable £735m, expected to rise to over £1bn by the year end. That gives the group some options. Further acquisitions could be on the cards or it could return some cash to shareholders with a share buyback or special dividend. Either way, it helps prop up the 8.9% prospective dividend yield which reflects strong cash flow under the current conditions. Remember though, conditions can change, and no dividend is guaranteed.
Investors should also be aware that Barratt's dividend coverage ratio is going to start tempering - if profits and cash flow stay healthy this shouldn't mean any drastic changes. But it means there'll be less of a safety net protecting the dividend should conditions turn.
We should also mention exceptional costs, which 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 this year. We hope to see them fall from there.
Ultimately, Barratt's in good health, and we think the long-term fundamentals of the UK housing market remain intact. Rising interest rates and a cost-of-living crisis have the potential to take some heat out of the market though, and housebuilder stocks have come under pressure this year due to those fears.
For those prepared to accept those inherent risks, the current valuation could prove to be an attractive entry point.
Barratt Developments key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Trading Update
Over the period, the group's net private reservation rate increased to 0.93 (2021: 0.83). The group operated from an average of 326 active outlets (2021: 346), with 31 new outlets opened over the period.
The group is fully forward sold for 2022 with an order book worth £4.4bn. That's up 18.6% on last year and comprises 15,821 homes.
Barratt has approved the purchase of 5,076 plots (2021: 6,399) on 29 sites, bringing the year-to-date total to 13,945 plots (2021: 12,034) on 77 sites. The group intends to bring total plots to 18,000-20,000 by 2022, covering 4.5 years of construction.
As at the end of April, Barratt had around £735m of net cash, and undrawn credit of £700m. Year-end net cash is still expected to be £1.0bn-£1.1bn.
The group signed the government's fire safety pledge, agreeing to fund the cost to fix cladding issues on buildings it developed.
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.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.