Barratt Redrow at an inflection point

There are creases which are yet to be ironed out, but the expected impetus to the new enlarged Barratt Redrow (LSE:BTRW) following the acquisition of Redrow is already showing some early signs of success.

Indeed, the group is hoping that it is now at an inflection point, with its confidence in future prospects bolstered by the acquisition, such as providing access to the more affluent market in which Redrow tends to operate.

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At the same time, early synergies have resulted in the group upping estimates for cost savings of £100 million by year three from a previous £90 million, with a combined land pipeline of over 92,000 plots and an intent to deliver around 22,000 homes per annum in the medium term still in place. Complementary geographical footprints add a further intriguing dimension to the deal, while ambitious targets for operating margin of 15% and a Return on Capital Employed of 20% (currently 8.1%) will boost financial firepower if achieved.

In the meantime, the results are something of a curate’s egg. The impending difficulties which the consumer will face, in part to the measures announced in the Budget, could temper demand and indeed affordability, as the group is currently encountering in the affordable home sales segment.

In the recent past, high interest rates and an uncertain economic outlook have weighed on profitability, while build cost inflation was another notable headwind, Barratts attempted to mitigate some of this pain with sales incentives and an increasing use of part-exchange to see deals through, with an inevitable impact on margins which remain under some pressure.

The government’s pledge to reform the red tape of planning rules, which has been a thorn in the side for the industry in recent times, has been warmly received by the industry but will by definition take some time to implement. The general housing shortage in the UK will remain an issue, although of course the situation underpins prospects for the housebuilders, where prices have continued to tick higher.

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However, there are equally signs of significant progress on which the group can build. Revenues of £2.28 billion for the ended 29 December 2024 represented an increase of 23.2% compared to the previous period, while pre-tax profit of £117.2 million was 23.1% higher. Total home completions of 6,846 was 10.9% higher, leading to a marginal uptick in the expected range for the year as a whole to between 16,800 and 17,200 homes.

Current trading, since the end of this reporting period is also showing promise. A net private weekly reservation rate of 0.6 is a 33% improvement on the previous 0.45, with the forward order book now at £3.35 billion from £3.14 billion. Indeed, the solid reservation activity already being seen in this calendar year has resulted in the group stating that adjusted full year pre-tax profit is now likely to be towards the upper end of expectations.

The cash generative nature of the business is also flowing through to shareholder returns, with the announcement of a £50 million share buyback programme which is intended to represent the beginning of a £100 million annual exercise.

In addition, an increase to the dividend (following a near-halving of the payment last June) propels the projected yield to 3.95%, somewhat lower than historically, but perfectly attractive by any standards. These measures come despite the decrease in net cash to £459 million from £753 million, partly due to the dividend payment but also reflecting further land investment.

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The Redrow acquisition was a clear signal of intent and the warm reaction to this update removes some elements of any lingering doubt. There will be some integration risk, but the early signs are that fortunes may well be changing for the better.

Barratt Redrow is under no illusions that challenges remain, and the share price similarly has some work to do. Prior to this update, the shares had declined by 10% over the last year, as compared to a gain of 15.9% for the wider FTSE100, and by 30% over the last three years. Nonetheless, prospects have been bolstered by the outlook for the medium term, as indeed has a market consensus which has recently improved to a strong buy, suggesting that bulls of the stock are beginning to return in full force.