ii view: Barratt Redrow offers reassuring maiden update

AGM/First quarter trading update to 13 October

• Combined home reservations (22 Aug to 13 Oct) up 37% year-over-year to a rate of 0.67 per week
• Expects at least £90 million of cost savings

Guidance:

• Expects total group home completions for the current financial year of between 16,600 and 17,200

Chief Executive David Thomas said:

“This is an exciting new chapter for our business. Barratt Redrow is uniquely well-positioned to meet the need for new homes of all tenures across the country. We have superior scale, with a differentiated multi brand offering that can be deployed across our strong combined land portfolio. 

“We begin this journey with a strong balance sheet, a solid forward sales position and the ability to add significant value through cost and revenue synergies. We look forward with confidence to delivering a smooth and efficient integration process, and to capturing the enhanced growth opportunities ahead of us."

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ii round-up:

In its first update as a combined entity, housebuilder Barratt Redrow (LSE:BTRW) pointed to more stable market conditions, with increased mortgage availability and affordability.

Combined private home reservations from the day the merger completed on 22 August to mid-October improved 37% year-over-year to a rate of 0.67 per week. The newly enlarged home builder expects build completions for the current financial year to 30 June of between 16,600 and 17,200. That’s potentially ahead of City expectations of nearer 16,500. 

Shares in the FTSE 100 company rose 2% in UK trading having come into this latest new down 16% year-to-date. The FTSE 100 index is up 7% in 2024. Rival housebuilder Persimmon (LSE:PSN) is up 15% year-to-date. 

Barratt Redrow expects at least £90 million of cost savings, with a run rate of £45 million targeted by end of year one and £81 million by the end of year two.

Staff consultation on divisional closures is now underway, with management hopeful that the new company, which received government clearance on 4 October, can achieved build completions in the region of 22,000 over the medium term. 

An independent Barratt traded from an average of 305 sales outlets during this latest quarter and Redrow a total of 118. Combined brands are expected to create opportunity for 45 incremental sales outlets come the full year 2028, with around 30 delivered by fiscal year 2027. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares following the news, highlighting the housebuilder as a ‘top pick.’

Group results for the 26 weeks to 29 December 2024 will be announced on 12 February. 

ii view:

Barratt was started in 1958. Redrow’s history dates to 1974. Management rationale for the enlarged builder include helping the country address a housing shortage, delivering significant cost savings and bringing revenue synergies via accelerating homebuilding through scale, geographic coverage and the three complementary brands of Barratt, David Wilson and Redrow. 

For investors, an uncertain UK economic outlook including potential tax rises to reduce elevated government borrowing could dampen buyer demand. Government pledges regarding planning reforms are at an early stage and might hit bumps in the road. Costs generally for businesses are now heightened, while a forecast price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap.

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More favourably, the newly enlarged company adds scale, with costs savings expected. Sales rates have recently improved, likely buoyed by ongoing consumer hopes for interest rate cuts. Potential government action to cut planning hurdles should prove favourable for the sector overall, while accompanying management comments point to what it believes is a ‘strong’ balance sheet. 

In all, and while some caution looks sensible given still pressured consumer spending, a consensus analyst estimate of fair value above 570p per share plus a forecast dividend yield of more than 3%, look to offer grounds for longer-term optimism. 

Positives: 

• Offers regional UK geographical diversity
• Targeting cost savings

Negatives:

• Uncertain economic outlook
• Sector competition 

The average rating of stock market analysts:

Buy