- Forward sales slump
- Cash position healthy
Listed housebuilders’ shares slid across the board on the morning of Barratt Developments’ (BDEV) trading update for the year to 30 June. While this week’s better-than-expected inflation figures subsequently sparked a rally in the sector, company data still looks weak.
Barratt’s forward sales sank 39 per cent to £2.22bn due to the highest mortgage rates since 2008 driving down buyer appetite. That same morning, the most downbeat RICS estate agency survey in 14 years found the difference between those currently seeing rises and those seeing falls in home prices fell to -46 per cent last month, suggesting that house price falls have further to go. Acknowledging the difficulties ahead, Barratt forecast that its sales would sink a further 6 per cent in its 2024 results.
As well as rising rates, Barratt has also been hit by the end of Help to Buy, which it said partly explained why first-time buyer reservations were down by around half. Post-Grenfell fire safety and general safety costs on legacy buildings were another hit. The government is keen to right the wrongs that led to the tower fire tragedy, so it has pushed the housebuilders to spend billions on making their buildings safer.
Barratt and its peers often call these costs ‘exceptional’, but this will be the sixth consecutive year Barratt has paid out: £7mn in 2018, £3.2mn in 2019, £39.9mn in 2020, £81.9mn in 2021, £412.5mn in 2022, and a further £180mn this year. The more Barratt investigates its legacy safety issues, the more it seems to find, suggesting additional costs to come.
The positive news is the company still forecasts pre-tax profit in line with analyst expectations of around £881mn. Also, its balance sheet remains strong with £1.07bn in net cash, helpful when interest rates are at multi-year highs.
And if those rates continue to putoff buyers, Barratt has found a growing source of income in its sales to institutions. A partnership with Lloyds’ (LLOY) social housing division alongside deals with other social housing providers and big-name build-to-rent operators accounted for35.8 per cent of its net reservations, a massive surge from last year’s figure of just 2.9 per cent.
Despite this, Barratt’s price couldfall further before it recovers. Its price to Investec’s forecasted 2025 earnings is 10.5, much higher than in previousyears. Investec also predicts a dividend yield of 4.4 and 4.6 per cent for 2024 and 2025, much lower than in prior years. Better news on inflation has provided a short-term boost, but the company is not out of the woods yet.
Last IC view: Hold, 470p, 8 Feb 2023
