Barratt Developments Group Plc Interim Update – 18 February 2014

Company Overview

Barratt Developments Group Plc is the UK’s largest house-builder by volume. Its principal business is development of residential homes, many of which, are located in the South east of England (Inc London) and Wales.

Although most of the group’s resources are focused upon delivering new homes, Barratt also spends a significant amount of time sourcing its own future developments sites, which are held within its land bank.

The group has a market capitalisation of £4.8 billion, is listed on the London Stock Exchange, and is a constituent of the FTSE 100 index.

Index FTSE 100 Ticker BDEV.L Latest Close 488.10
52 Week High 489.80 52 Week Low 323.50 P/E (H) 15.6X
Dividend Yield %  (E) 2.8 Dividend Cover (E) 3X CEO: Mark Clare
CFO: David Thomas Previous Price Target 325.00 Current Price target 418.00


Barratt Developments reaches new multi-year peaks after hitting our price target in August

After falling to hit our price target of 325.00 pence, during a tough first half to 2014, Barratt Developments rebounded sharply higher during the second half as the sector pared earlier losses.

Key to the sector’s recovery has been the lesser than expected impact of new mortgage regulations, changes to rules surrounding loan to income multiples (LTI’s),  followed by a backwards revision to the likely timing of an initial interest rate hike hike from the Bank of England.

This is while at the company level, Barratt’s management unveiled a 305% increase in basis earnings per share for the full 2013/14 year in September.

In addition to higher earnings, the group closed the year with a net cash balance of £73 million, which compares favourably with the net debt position of £25.9 million in the previous period. An improving leverage profile also added to an already significant boost in returns on capital, thereby, increasing the attractiveness of the shares to investors.

As a result, Barratt Developments (BDEV.L)  closed the 2014 year at 470.00 pence, which is just a short distance off from a 7 year high for the group.

Barratt Developments Plc Share Price / Daily Intervals



Balance sheet, dividend and valuation update

In terms of the balance sheet, gearing at Barratt Developments remains relatively low (10%), as management continue to make prudent use of leverage. This is while returns on capital remain at a healthy 20%, which is beaten only by Berkeley, Galliford Try and Crest Nicholson.

Management also reaffirmed their satisfaction with the group’s financing arrangements in the January trading update and, considering our positive outlook for house prices, earnings and underlying NAV, we see no cause for concern over the group’s financial position.

In relation to the dividend, management also reaffirmed their long term dividend strategy in January, which is to pay out ⅓ of earnings to shareholders. With consensus estimates for EPS in 2014/15 taken into account, the total payout should be in the region of 14.0 pence per share, which equates to a yield of 2.85% at current prices and a cover ratio of 3X.

From a valuation perspective, at 2X TNAV, there are both cheaper and more expensive housebuilders in the UK at present. On balance, we believe that Barratt Developments is close to being fully valued at present, both in absolute as well as relative terms.

However, looking ahead we see scope for compression in valuation metrics due to both the pace of earnings growth within the sector as well as downside pressures upon share prices arising from the general election in the UK.

With both NAV as well as historical (15.6X) and forward earnings (11.4X) multiples taken into account, we see scope for some compression in valuation metrics at Barratt over the coming quarters, although to a slightly lesser degree than some of the group’s counterparts (Berkeley, Galliford Try & Persimmon).

In line with our earlier notes on the sector, we believe that valuations are likely to bottom this year as a result of strong earnings growth and selling pressure from investors as a result of the coming general election in May.


The takeaway

While we wrote at length previously about how we anticipated that a slowdown in mortgage lending and rising interest rates would lead the sales volumes, revenues and earnings outlook to darken for UK house-builders; the majority of these firms appear to have fared better than we expected throughout H2 2014.

With this, current fundamentals for the industry and the future outlook for the UK economy taken into consideration, we have revised our expectations for the UK house-building sector in 2015. For the full report, please click here; Updating our outlook for the UK housing market and for UK house-builders

At the company level and in summary, we believe that Barratt Developments is close to being fully valued at present, although we expect this to change for the better over the coming months. We view our full valuation assertion as reasonable because, at 2X NAV and just 15X historical earnings, we see the group as having passed the point in the cycle at which valuation measures are still falling.

This means that share price growth is likely to outstrip earnings growth at Barratt Developments going forward and therefore, it also marks an inflection point in the cycle for the group.

While this will be positive for investors in the near – medium term it should also come as a warning that the shares, while still having scope for further upside in 2015, may also be close to peaking out.

However, we note that the coming general election should alleviate some of the valuation pressure evident in Barratt shares. This is mostly because of political uncertainties over the future of the help to buy program, although there is also a historical precedent that dictates shares in UK house-builders should fall ahead of the election.

As a result of our analysis, we raise our price target for Barratt Developments today from 325.00 pence to 418.00 pence per share, although this still implies a certain degree of downside potential to the shares.

The revised target corresponds to a price/NAV value of 1.7X as well as a forward and historical earnings multiple of 9.7X & 13.4 respectively.

The next scheduled event of note for Barratt Developments Plc is the release of interim results on 25 February 2015.


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