Barratt Developments

Description

Barratt Developments is the UK’s largest housebuilder, benefiting from very strong brand recognition, high customer satisfaction and good sales capability. The company is entirely domestically-focused and through its three consumer brands – Barratt London, Barratt Homes and David Wilson Homes – it offers housing solutions for property buyers across the income spectrum.

Barratt Developments is a highly cash generative business with a management team dedicated to creating shareholder value through a combination of improving profit margins and steady volume growth. Additionally, the company distributes excess cash via an attractive ordinary dividend which, in recent years, has been augmented by regular special dividends as well.

Investment case summary

In 2017, our increasingly benign view of the UK’s economic prospects combined with the wider market’s pessimistic view towards domestically exposed businesses in the aftermath of the EU referendum, created a contrarian opportunity to revisit the UK housebuilding sector for the first time in many years. In doing so, Barratt Developments emerged as one of several housebuilders that have looked attractive enough to force their way into the portfolios.

In our view, UK housebuilders and the construction industry more broadly is benefiting from structurally positive supply-demand dynamics. Fixing the UK’s ‘broken’ housing market inevitably means building many more homes and, although some have concerns about house prices, from an affordability perspective, with interest rates near record lows, mortgage repayments represent a much smaller part of take-home pay than is normally the case.

Importantly, the Barratt Development investment case revolves around its ‘self-help’ initiatives, which should allow higher profit margins and deliver modest volume growth by introducing a focused range of new, cheaper to build houses, reducing building costs and increasing usage of strategic land.

We view Barratt Developments as a high-quality business with an attractive starting yield and a sustainably growing dividend. Over time, as the business delivers its self-help improvements and the market recognises that this business is not as challenged by the economic outlook as its share price would imply, we expect it to return to a more appropriate valuation territory.

Ask a question about our investment in Barratt Developments

Fund exposure
Income Focus Fund 4.04%
Equity Income Fund 6.73%

As at 30 November 2018

Segmentation
Geography United Kingdom
Industry Consumer Goods
Themes UK domestic exposure

Source: Woodford

Share Price

Market Quotes by TradingView

Commentary

A good set of full year results

Barratt Developments today reported some good numbers in its full year results which highlighted that operationally everything is going in the right direction. In particular, total completions were up 1.1% over the period, to 17,579 properties – this is the highest number of completions in a decade.

Meanwhile, Barratt saw its revenues up by 4.8%, helped by good growth in the average selling price of its completions. Additionally, despite headwinds in the high-end London property market, the company recorded increased gross and operating profit margins, reflecting the success of its ongoing self-help initiatives. It also delivered 8.5% growth in earnings per share. Finally, the dividend was increased by almost 5% and the business announced a special dividend of 17.3p, the same level as last year.

Overall, this is a good set of results that demonstrate good financial and operational performance – quite the contrary to what the market consensus is pricing into Barratt Developments’ shares, and indeed in the share prices of many other domestically-focused companies.

Stephen Lamacraft
5 September 2018

Robust trading update

Barratt Developments announced today a very strong full-year trading update, with cash and margin figures better than expected and profit towards the top of the guided range. Indeed, margin improvement is ticking along nicely and we believe there is more to come on this front. Additionally, market conditions remain supportive and the outlook positive.

The recent share price weakness looks well out of place in the face of today’s robust trading update. The shares currently trade on c.7x 2019 estimated earnings and a c.9% dividend yield. Consensus looks too conservative for 2019 given the trading statement today and we would expect some upward revisions to estimates. Barratt Developments remains the cheapest of the volume housebuilders with arguably the most to go after in terms of self-help.

Alex Correia
11 July 2018

Positive start to the year

A short and sweet trading statement from Barratt Developments this morning, with guidance for the full year remaining in line with expectations. Trading has been strong across the country, with good customer demand and a benign lending environment. The company benefits from a healthy forward order book and a robust balance sheet.

The outlook continues to be positive, margin initiatives continue apace (for example, the new housing ranges reduce the number of designs from 160 to 50), sales and demand remain strong with no reported impacts from the poor weather. The valuation of the stock remains compelling, with a single digit PE and close to 8% dividend yield.

Alex Correia
10 May 2018

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2019 Woodford Investment Management Ltd.
All rights reserved.

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