There is an element of kitchen-sinking to these numbers as Barratts has revealed the true extent of a difficult year.
The group has to hope that this also marks an inflection point. It has confidence in its future prospects, which should be given fresh impetus by the acquisition of Redrow (LON:RDW), a deal which is now all but over the line. The acquisition is a clear statement of intent, which should come with annual cost synergies of £90 million by year three and a combined land pipeline of over 92000 plots, which would give the new entity significant firepower as and when economic constraints abate. When the deal is finally agreed, Barratts (LON:BDEV) will be in a position to assess capital requirements for the enlarged group with an eye towards current legacy costs as well as its desire to be active in the land market. Complementary geographical footprints add a further intriguing dimension to the deal.
In the meantime, a net cash position of £874 million at the time of the deal announcement and a current balance for Barratts of £868.5 million also allows room for further expansion as and when the opportunities arise. Home completions of 14000 during this reporting period were at the top end of the group’s range, although down by 19% from the previous year given lower order book and selling outlet numbers.
The sector has also recently received a boost from the new government’s pledge to reform the red tape of planning rules, which has been a thorn in the side for the industry in recent times. This is in addition to further changes in policy to drive housebuilding targets and support the sector in delivering these homes which, given the nation’s obsession with house ownership and a longstanding shortage of supply, could lead to an improved backdrop.
There are also other factors at play, such as signs that house prices are beginning to rise at a clip once more, while mortgage availability and affordability are potentially turning a corner. In the weeks of July and August, after the end of this reporting period, net reservation rates per outlet per week rose to 0.58, having been at 0.42 for the full year, indicating an early sign of promise in the year to come. In addition, the order book is currently already 42% sold, as compared to 45% in the corresponding period, suggesting some stability.
However, these results relate to the past year and they hardly make for easy reading. For much of that time, high interest rates and an uncertain economic outlook weighed on the consumer, with affordability a key issue. Build cost inflation remained in play although reducing, while some operating margins were sacrificed by way of elevated levels of sales incentives and an increasing use of part-exchange to see deals through and tease some demand. This is starkly shown by a gross margin which reduced from 18.3% to 12.2% and an adjusted operating margin of 9%, as compared to 16.2% previously. Lower home completions and average selling prices alongside legacy building remediation costs of £192 million also weighed heavily on the headline numbers.
Revenues of £4.17 billion for the year were down by 22% although in line with expectations, while adjusted pre-tax profit of £385 million was 57% lower although ahead of the expected £377 million. Overall pre-tax profit however, down by 76% to £170.5 million, missed estimates of £247 million by some way. Taken together, and based on the way in which Barratts calculates payments, lower profits have resulted in a reduction to the dividend, which is never well-received by investors. The projected yield of 3.1% compares to a previous level of 5.4% and largely removes an attraction of the investment case in that investors were hitherto being paid to wait ahead of a transformation in the housing economic cycle.
Barratts may be keen to consign these numbers to the history books and concentrate on the promise of things to come. There are some signs of an improving economic backdrop, the group keeps a sharp focus on factors within its control and the Redrow deal could be transformative if the element of integration risk over the next couple of years is successfully navigated. Renewed focus on the sector has also been positive for the share price, which has risen by 15% over the last year, as compared to a gain of 11% for the wider FTSE100. Over the last three years, however, the scale of the challenge is more evident with the shares remaining down by 27%, although this has left Barratts looking relatively cheap in terms of historical valuations. Even so, the jury remains out with investors unwilling to commit fully to the group’s potential prospects, and the market consensus of the shares as a hold is likely to remain in place for the time being.