Barratt reports plunge in profits – but Redrow deal could make it stronger

The news that Barratt Developments (BDEV) is to buy its rival Redrow (RDW) overshadowed the 81 per cent nosedive in pre-tax profit in its results for the six months to the end of last year. 

The two things are likely to be connected. With the housebuilding market in a slump due to high interest rates, it makes sense for Barratt and Redrow, which also posted a plunge in profit over the same period, to bundle their resources together. As property author and journalist Peter Bill put it on X (formerly Twitter), "Baby, it’s cold outside, let’s huddle with Redrow".

Without the deal, it could well get a lot colder for Barratt. Forward sales have slumped by a fifth by volume and 14.9 per cent by value. It has had more success growing its bulk sales to social housing providers and build-to-rent (BTR) landlords. While its private completions sank by over a third, its BTR completions soared 20-fold by volume as social housing completions climbed 12.8 per cent.

This is the same model that Vistry (VTY) has shifted its entire business towards, seeing better returns for these sales than to private individuals, and it now accounts for 16.2 per cent of Barratt's total completions.

However, the shift has not been enough to change Barratt's fortunes. Assuming business as usual, analyst Investec forecasts that earnings per share will plummet 69.8 per cent to 25.3p for 2024. It does predict some recovery in 2025 and 2026, to 28.2p and then 34.5p, but this would still be far from current or 2022 levels.

If the deal goes ahead (the competition watchdog's probe over land banking could be a factor), analysts are split on how beneficial it will be. Aynsley Lammin, an analyst at Investec, said the "very sensible" deal will make the combined group more resilient to externalities. On the other hand, former analyst and IC writer Robin Hardy notes that there is a "long and sorry history" of housebuilder mergers failing to add value because the model does not necessarily benefit from the economies of scale (noting Vistry as a possible exception) and questions how Redrow's culture of quality housebuilding at a higher price point will fit with Barratt. 

From a valuation perspective, Barratt looks expensive on a price/earnings basis compared with its peers, but cheap considering its discount to net asset value and dividend yield. The deal may change all that. With such uncertainty, we maintain our neutral rating but are sceptical overall. Hold.

Last IC view: Hold, 435p, 6 Sep 2023