Redrow – earnings down as Barratt comes calling

Redrow (RDW) and Barratt Developments (BDEV) have some things in common. For both housebuilders, their merger announcement distracted from a hefty drop in revenue and profit because of high interest rates reducing buyer appetite.

However, the similarities end there, which could make a merger between high-end developer Redrow and the more mainstream Barratt difficult. The latter clearly admires the quality drive at Redrow, hence its decision to buy at a premium. Investors who held the stock before the announcement are due a win in that regard – provided the deal goes ahead amid a competition watchdog probe into the industry.

Considering the degree to which sales at Redrow have fallen, its focus on a higher price point is beginning to look out of touch with what budget-stretched buyers want. The housebuilder has responded by dropping its prices from an average of £481,000 in the first half of FY2023 to £465,000, but this is still much steeper than the average UK house price.

Some housebuilders have responded to the market malaise by chasing bulk sales to social housing providers or private rental landlords. Barratt's bulk deals now account for 16.2 per cent of Barratt's total completions, but it is still only a fraction of Redrow's business. Chief executive Matthew Pratt told the Investors' Chronicle in September it was "looking at it but on a very small, tentative basis".

Because of the offer, Redrow is now much more expensive. We wouldn't recommend buying in at this price, and an argument for taking profits and selling out has its merits, but we stick with our 'wait and see' rating. With Redrow's forward sales rising and interest rates easing, the merger could be a success. Hold.

Last IC view: Hold, 473p, 13 Sep 2023