Barratt Developments delivered 17,908 homes for the year ended 30 June 2022, an increase of 3.9% year-over-year and broadly in line with pre-pandemic levels.
Build cost inflation ran at around 6% last year, though it's currently running higher at 9%-10%.
Underlying profit before tax is expected to be between £1.05bn-£1.06bn, a touch higher than market expectations.
The board intends to pay a dividend based on dividend cover of 2.25 times underlying net income, details of which will be released with the full year results on 7 September 2022.
The shares fell 2.5% following the announcement.
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Our View
Another housebuilder, another set of results pointing to a resilient housing market. Completions were slightly lower than expected but came in ahead of pre-pandemic levels. More crucially though, demand looks to be holding up in the forward order book despite rising house prices.
That's testament to the ongoing resilience of the private house buyer, seemingly undeterred by a drop in real income as inflation and a cost-of-living crisis start to take their toll. Affordable housing didn't quite show the same strength, hardly surprising given those buyers are likely some of the worst impacted by lower real income.
There are signs that demand is easing in the boarder housing market though, with prices propped up by a lack of supply. That puts added emphasis on driving volumes higher to offset what seems like an inevitable cooling in prices. We see that as the key factor driving Barratt's long-term goal of 20,000 completions a year.
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.
However, build costs are being anything but co-operative. Trending at around 9-10% right now, that'll put pressure on margins if it doesn't come down sooner rather than later.
There's good news on the balance sheet side. An enviable net cash position in excess of £1bn gives 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 9.6% prospective dividend yield which reflects strong cash flow under the current conditions.
Remember though, conditions can change, and the group's dividend policy is directly linked to profits. So, if profits fall the dividend could too and they are variable and not guaranteed.
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 some of those fears.
The current valuation could prove to be an attractive entry point, but only for those prepared to accept those inherent risks.
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.
Full Year Trading Update
The group's net private reservation rate increased 3.8%, to 0.81 per active outlet per week. Healthy demand meant sites sold faster than expected, resulting in a slight drop in average active sales outlets from 343 to 332. Active sites were weighted toward the back end of the year - as of 30 June 2022, 352 sites were active.
The average selling price for private homes rose from £325,500 to £341,000. Price increases were higher for affordable housing, up 8.5% to £159,000, reflecting a higher proportion of completions from outer London sites.
As of 30 June 2022, forward sales were 4.3% higher at £3.6bn, equating to 13,579 homes. The private average selling price for homes forward sold was £375,400, reflecting house price inflation and a higher number of London units.
Over the year, the group approved the purchase of 19,089 plots for a total cost of £1.4bn. Land approvals in the new financial year are expected between 18,000-20,000.
At the end of the period, net cash stood at £1.1bn. That was down from £1.3bn the previous year, largely due to the £250m acquisition of Gladman Developments and increased land spend. Money owed to land creditors rose just north of 10%, to £730m.
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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