Better margins for Barratt

Barratt Developments has reported a fall in sales from 5,053 to 4,832 units in the six months to December, but operating margins doubled to around 5 per cent, thanks to a combination of higher selling prices and a change in the product mix. So while private home sales fell from 4,381 to 3,669 units, there was a shift towards higher-margin sales, and average selling prices rose 6 per cent to £176,000. The group also spent £318m acquiring 6,078 plots across 57 sites, taking the owned land bank to around 50,800 plots or the equivalent of 4.5 years supply. Active sites fell back from 368 to 352, but new sites opening in the second half are expected to boost this figure to around 400.

However, trading conditions are likely to remain tough in view of a continued squeeze on mortgage finance and rising unemployment. And while a further 110 sites are expected to open in the second half (with around 50 mature sites closing), Barratt reckons that sales growth will be limited. There are already a number of worrying trends, too. Net weekly private reservations per active site fell from 0.49 to 0.39, while the rate of cancellations rose from 17.8 per cent to 20.1 per cent.

Arbuthnot Securities says...

Buy. Our already cautious estimate of 11,500 unit sales for the full year could still prove to be ambitious, but a further improvement in margins could make up for any volume shortfall. As expected, borrowings were higher at £540m but below earlier forecasts, and management reckons that debt will fall to £400m-£450m by the June year-end. We currently expect the group to break even in the first half and make full-year pre-tax profits of £27m and EPS of 2.2p. Barratt has good exposure to the London market, where demand is holding up better than the rest of the country, and while growth is likely to be slow, we believe that the share price discount to net asset value (NAV) is too deep and it should be nearer 40 per cent, implying a share price of 126p.

Liberium Capital says...

Buy. Barratt's update was not as positive as that of rival Persimmon but was reassuring nonetheless. Margins are improving, and a change in the sales mix resulted in higher average selling prices, with the group expecting both trends to continue in the second half. And while our full-year pre-tax profit estimate of £40m may be a little high, we think that Barratt's presence in the south of England has been underestimated and concerns about balance sheet and financial risks are weighing too heavily on the share price.