All things considered, Barratt Developments PLC (LON:BDEV) is playing a decent hand with the woeful cards being dealt to them in the current environment.
The list of headwinds is well-documented and lengthy and is likely to spill over into the new financial year. Squeezed mortgage affordability and availability is resulting in waning customer demand, while broader concerns over general economic growth, consumer confidence and spending are all darkening the picture. At the same time, the removal of the Help to Buy scheme has removed an important plank from first-time buyers and legacy costs for remedial building work continue to come at a significant cost, totalling some £179 million in this period.
The spectre of inflation is an additional burden, with house price inflation failing to keep up with build cost inflation, which has been running between 9% and 10% over the year. There are, however, some signs of improvement on this front as some of these pressures show signs of easing, and Barratts is predicting a figure of nearer 5% over the coming year.
The uncertain outlook is reflected in the shareholder return announcement, traditionally a sign of management confidence. There will be no further share buybacks over the coming period, while the dividend has also been reduced as the group intends to retain its cash to buffer against the upcoming challenges. Despite the dividend reduction, the projected yield of 7.6% remains punchy given the economic backdrop and will continue to catch the eye of income-seeking investors.
Indeed, net cash of £1.1 billion leaves Barratts in a healthy position to weather any immediate storms. The group has stepped back from investment in new land, opting for a “highly selective” approach. At the same time, a continued focus on cost control, the targeted use of incentives and new sales to the private rental and social housing sectors are all likely to become dominant themes in the shorter term.
Against this backdrop and with a share price valuation which is running low by historical standards, the group has delivered a relatively robust performance. Revenues for the year increased by 1% to £5.3 billion, in line with expectations, while the adjusted pre-tax profit number of £884 million provided a small beat to the expected £880 million, even though the number was 16.2% lower than the previous period.
The reduction in activity and slight shift in the business mix, coupled with inflationary pressures, weighed down on both adjusted operating margin, which declined from 20% to 16.2% and return on capital employed, which fell to 22.2% from a previous 30%. Completions were also down by 3.9% over the period to 17206, with the group guiding a range of between 13250 and 14250 for the current year. Net private reservations also fell over the year, and have continued to decline in the last few weeks despite the traditional seasonal bounce. More positively, a forward order book of £2.4 billion is already 49% forward sold for the year, providing some visibility of earnings.
The cut to the dividend is inevitably disappointing but a prudent move in a tightening environment. While there has been havoc in the sector, resulting for example in the imminent relegation of peer Persimmon (LON:PSN) from the premier index, Barratts has managed to hold up well in relative terms. Over the last year, the share price has risen by 8.5%, as compared to a gain of 2% for the wider FTSE100. On closer inspection, however, the 38% fall in the share price over the last two years provides some perspective as to the damage which the economic situation has wrought. The housebuilding sector is currently one which requires a longer-term view, especially in light of a prevailing housing demand and supply imbalance. The market consensus of its shares as a buy reflects confidence in Barratts’ ability to emerge from the storm in relative health.