Barratt Developments has just had its best spring selling season for five years. Not much to boast about, might be the cynical response, given what's happened since 2007. Even so, with reservations up 25 per cent on the year and its shares still selling for less than half their underlying asset value, we reckon it's time to switch our recommendation on Barratt's shares to a buy.
- Shares trade at half asset value
- Solid forward sales
- Strongest Spring selling for 5 years
- Profit margins improving
- No dividend yet
- Housing market still vulnerable
True, Barratt once epitomised the worst excesses of the UK's house-building bubble that burst in 2007. The following years of painful adjustment meant Barratt's asset base was battered with huge writedowns on its land bank, while shareholders were tapped for a rights issue and said goodbye to dividends.
However, things have changed. House builders are slimmer and fitter, and many have performed so well that their share price is higher than net asset value. Not so with Barratt, where, even after taking off goodwill and other intangible assets, the shares still trade at 34 per cent below the value of net tangible assets. So the price has more catching up to do than any other housebuilder's. Recent trading suggests that Barratt is performing well enough for the catch-up to start.
| BARRATT DEVELOPMENTS | ||||
|---|---|---|---|---|
| ORD PRICE: | 134p | MARKET VALUE: | £1.31bn | |
| TOUCH: | 133.5-134p | 12-MONTH HIGH: | 153p | LOW: 65p |
| DIVIDEND YIELD: | 2.3% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 301p | NET DEBT: | 19% | |
| Year to 30 Jun | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 2.29 | -679 | -136 | nil |
| 2010 | 2.04 | -163 | -14.5 | nil |
| 2011 | 2.04 | -11.5 | -1.40 | nil |
| 2012* | 2.35 | 97.0 | 6.59 | 2.04 |
| 2013* | 2.48 | 163 | 12.5 | 3.13 |
| % change | 6 | 68 | 90 | 53 |
Normal market size: 18,000 Matched bargain trading Beta: 1.6 *Deutsche Bank estimates | ||||
This spring's crucial selling season was Barratt's strongest for five years, with net private reservations up 25 per cent from a year earlier, and forward sales up 16 per cent to £828m. Site numbers have grown from 374 a year ago to 397, while the cancellation rate on reservations has fallen from 16.1 per cent to 15.4 per cent. With more family homes being built and fewer flats, both selling prices and profit margins have been boosted. What's more, Barratt has been steadily working through expensive land acquired before the collapse in values, and expects more than a third of completions for the year just ended to be built on cheaper land. Yet Barratt's profit margins remain far short of the best, so there is scope for more catching up.
Some scars have yet to heal though. There hasn't been a dividend since 2008. While a payout may be restored for the year just ended, it's likely to be modest. Management has been using the improved cash flow to drive down debt. True, finances were underpinned by a £721m rights issue in 2009, but net debt in the past three years has still fallen from £1.28bn to an expected £275m.
