Fast-acting Barratt Developments cautiously optimistic

There’s no dividend, but investors are chasing the shares higher after this full-year trading update. 

As investors search for rays of light in the current economic fog, Barratt Developments (LSE:BDEV) has provided a glimpse of cautious optimism.

The immediate impact of lockdown across the country was partially offset by an earlier return to some kind of normality, with government restrictions on housebuilder activity removed in the middle of May. As such, the likes of Barratts have had some time to assess not only the financial impact on the business over a relatively short period of time, but also the appetite of house buyers in an economic environment which remains fragile.

The picture here for Barratts is inevitably mixed. On the one hand, completions for the year as a whole have declined by 29%, and this figure would have been greater but for the progress the company had been making prior to the pandemic. Equally, there are signs of an improvement in customer demand, with the forward order book looking particularly healthy, up 25% year-on-year in terms of both the number and value of homes in the pipeline. 

At the same time, the group was nimble in mitigating the financial effects of the pandemic by implementing some swift actions. The suspension of all land buying activity and the postponement of non-essential capital expenditure provided an initial boost. This was further underlined by the removal of both the interim and the special dividends, saving £100 million and £175 million respectively. 

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Less positively, there was a drain on resources, although the company has retained a net cash balance of £305 million, as compared to a prior year number of £766 million, with further access to an undrawn credit facility of £700 million. This financial resilience should augur well for the resumption of capital returns to shareholders, where the previous projected dividend yield of around 7% had been of significant interest to income-seeking investors.

Further out, 90% of the housebuilding materials which Barratts obtains are manufactured or assembled in the UK, which has not only served it well during the pandemic, but should also provide some insurance whatever the outcome of the resumed Brexit negotiations. The company has also joined a growing throng of businesses which appreciated the provision of furlough cash for employees, but has now decided that the business can withstand the hit, and will be repaying all of the funds received from the government.

Visibility on the road ahead remains murky, however. It is too early to quantify the full economic impact of the pandemic on the UK, let alone consumer confidence, and any recovery could be drawn out. The resumption of Brexit talks could also weigh generally on the sector, while the Help to Buy scheme, which has been such a boon, is currently due to expire in March next year. This could punch a further hole in profits unless an extension to the scheme is announced.

In the meantime, generally good mortgage availability, historically low interest rates and a housing shortage, all play into the bull case for the sector, and the share price has seen a spike of 28% over the last three months as some relief to the housebuilders begins to emerge. 

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However, the damage of the pandemic has left a mark, and the shares remain down 16% over the last year, which compares to a decline of 18% for the wider FTSE 100 index. Even so, Barratts has long been well-regarded in its space and has shown its resilience in the midst of a virus which has been crippling for many. 

The market consensus of the shares as a ‘strong buy’ is therefore likely to be maintained, particularly in light of the company’s own sensibly guarded belief in its prospects.

Results for the year ended 30 June 2020 are due to be published on 2 September.