Barratt Developments off the boil

Monday, Apr 18 2016 by
3
Barratt Developments off the boil

Shares in the UK homebuilder Barratt Developments recently hit their lowest level since June 2015. The upcoming EU vote, weakness in the prime London housing market and a weak update from Persimmon have all hit sentiment. However, Barratt is currently expected to return 100p a share by November 2017.    

The UK home building sector is cyclical and can see periods of optimism and pessimism even in the midst of a long-term bull market. Barratt Developments, for example, saw its shares fall 25% from the 2014 peak to the year’s low point.

Last week’s closing share price of 509.5p is 23% lower than the high of 662.5p seen in September 2015. This time around we are further into the UK housing cycle, which increases the risk that the market will turn in the near-term.

In April the extra 3% stamp duty came into effect on second homes and buy-to-let property in the UK. The uncertainty of the EU vote may be hitting demand and in London the top end of the market is seeing weakness.

Barratt Developments: turning farm land into homes

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Source: Barratt Developments

Turning to UK homebuilders and the latest trading update from Persimmon showed a slowdown. Weekly private sales per site so far in 2016 increased by 6% on a year ago which means that the last seven weeks only saw a 2.5% increase.

The update led to a sell-off across the UK homebuilding sector with Barratt ending the week 6.4% lower than the high it saw on Wednesday. The next update from the group is on 11 May with final results set for 7 September.

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Barratt Developments’ valuation: yield appeal

Forecasting the future is easier said than done and therefore the near-term valuation of a stock is a good place to start. A low valuation should offer investors a “margin of safety” even if there is a difficult period ahead.

Barratt Developments saw earnings per share in the six months to December 2015 increase by 40% to 23.9p. The operating margin improved by 1.9% on a year ago to come in at 16.1% in the period.

The most recent forecast for earnings per share for the financial year to June 2016 is 54.2p. The forecast P/E for the next 12 months comes in at a relatively modest figure of 8.68X earnings (based on a share price of 509.5p).

Barratt Developments had a modest net cash position…

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Barratt Developments PLC is a holding company. The Company is principally engaged in acquiring and developing land, planning, designing and constructing residential property developments and selling the homes, which it builds throughout Britain. The Company operates in two segments: Housebuilding and Commercial developments. Its housebuilding segment operates through approximately six regions and approximately 30 operating divisions delivering over 17,319 homes. Its Commercial developments are delivered by Wilson Bowden developments. It purchases land in targeted locations and designs homes for its customers using standard house designs. Its brands include Barratt Homes, David Wilson Homes and Barratt London. Its Barratt Homes brand focuses on making homes. Its Barratt London brand portfolio offers apartments and penthouses in Westminster to riverside communities in Fulham. Its David Wilson Homes brand offers home design and specification, and focuses on developing family homes. more »

LSE Price
659.2p
Change
5.6%
Mkt Cap (£m)
6,711
P/E (fwd)
9.2
Yield (fwd)
7.0



  Is LON:BDEV fundamentally strong or weak? Find out More »


2 Comments on this Article show/hide all

BlueFrew 18th Apr '16 1 of 2

£800 a square foot is not an "affordable" price point. With the (tiny) average UK house size of 818 sq ft that implies a selling price of over £650,000.

Anybody who invests in this unsustainable nonsense has a harsh lesson coming.

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Andrew L 18th Apr '16 2 of 2
1

BlueFrew - fair point. Arcadis describes the prime end of the London market at £1,350 per square feet or more. Barratt had 90% of London completions in the first half at £800 per square foot or below. So the average completion point for the group would have been well below £800 per square foot.

Agree to describe London as "affordable" is a stretch but below £800 per square foot is certainly a lot more affordable than the prime end of the market.

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