Unanswered questions for Barratt

It was hard to find much to fault with Barratt Developments' (BDEV) results as the housebuilder reaped the combined benefit from the tail end of the stamp duty holiday, better completion rates and a basic recovery in its margins. However, the market took the fall in private reservations of 12 per cent, a key lead indicator for future business, as a sign that next year might prove to be less memorable.

On an operating level, the group delivered the houses that it needed to take advantage of a very buoyant property market. Completions of residential properties, which excludes social housing, were up by nearly 40 per cent to 13,134, which generated sales for the segment of £4.27bn, or over 30 per cent higher than a pandemic-affected 2020.

However, a breakdown of the movement in working capital showed, in part, why investors have taken a cautious line with Barratt. The group suspended land purchases during the pandemic in favour of cash conservation, which has ultimately led to a marked rundown in its inventory. For instance, the movement in working capital showed land held for development falling from £3.11bn to £2.94bn, with construction work-in-progress falling by a similar proportion. That leaves a question mark over whether capital spending needs to rise markedly next year, alongside existing inflationary cost pressures of around 4 per cent, for Barratt to keep its development pipeline flowing. The natural lumpiness of which, affected as it is by planning permission delays and consumer demand, also introduces another element of uncertainty.

There is also the ongoing problem for housebuilders of how the cladding review into exterior fireproof cladding will evolve. Since 2017, Barratt has had to make provisions of £184m to cover the legacy costs of various issues with cladding and external walls – of this, £81.5m was charged in these results, with a further £67.6m of provisions outstanding. Given the immense public outcry over leaseholders being charged huge sums for remedial work to correct dangerous cladding, there is simply no way of knowing whether Barratt, along with the other housebuilders, will ultimately have to pay a surcharge to help cover the total costs.

Taken together, this explains the glass ceiling over the group’s share price during the fourth quarter, which combined with a forward price/earnings ratio of below 10 times Credit Suisse’s adjusted forecasts, leaves the impression that Barratt has more to do if its performance isn’t to be dismissed as simply the result of one-off government stimulus. Hold.

Last IC View: Hold, 782p, 06 May 2021