Despite the rather gloomy outlook from some industry watchers a short time ago, housebuilder Barratt Developments PLC is now expected to beat initial market forecasts. Having completed a record number of new home builds and significantly improved its margins, the organisation’s annual profit is set to comfortably beat expectations.
Barratt has published a new trading update for the year running up to June 30, in which it revealed that a record 17,856 homes have been constructed during this year. That’s up slightly from 17,579 last year, including an impressive 17,111 wholly-owned completions. This represented a 2.6% increase year on year, with joint venture completions down 17.1% to 745 homes.
Supported by the decision to purchase sites with higher margins, the company’s operating margin increased to 18.9% this year from a prior 17.7%. Barratt’s performance has also been bolstered by the reversal of inventory impairment provisions and the disposal of legacy commercial assets.
In a pre-Brexit era of uncertainty where the British housing market is all over the place, Barratt continues to perform above and beyond most realistic expectations.
Declining Average Home Prices
Completions may have hit a new record high, but the average selling price for a new property for the year ending June 30 came out at £274,000 – a sizeable decline from the previous average of £288,900. According to Barratt, this is the result of a changing the mix of completions.
For example, private home completions grew 0.7% to 13,533, while affordable home completions increased 10.4% to 3,578. In the affordable homes bracket, average prices increased from £123,700 to £131,000, but the average selling price of a private home fell from £328,000 to £312,000.
On the whole, the company stated that its joint ventures have delivered a higher overall profit than expected of £35 million – a significant improvement on last year’s £18.6 million. This was due largely to sizable gains on land sales.
Total Profits Better Than Expected
In terms of total pre-tax profits, Barratt now expects to comfortably exceed the estimates of analysts. The company now expects a total profit of £910 million, up from 2018’s £835 million.
Like many major housing companies, Barratt has responded to the Central London housing market slowdown by focusing more heavily on developments further afield. The company now has 18 private properties scheduled for completion within its Central London portfolio – a far cry from last year’s 145.
Going forwards, Barratt intends to continue focusing on margin improvements.
“Whilst there remains some economic and political uncertainty, the group is in a strong position,” Barratt said.
“We have a substantial net cash balance, a well-capitalised balance sheet, a healthy forward sales position, a continued focus on delivery of operational improvements across our business and an ongoing commitment to deliver the highest quality homes across the country,”
“We believe that this gives us the resilience and flexibility to react to potential changes in the operating environment in fiscal year 2020 and beyond.”
Despite its declaration of better-than-expected profits for 2019, the positive news didn’t have any real impact on Barratt’s share prices. Shares traded at 576.2p during morning trading – no real difference than the day before.
Nevertheless, experts at Peel Hunt spoke with great optimism regarding Barratt’s current performance and future outlook, increasing its target price to 630p.
“The group’s margin story has been a key differentiator over the last 6-12 months especially as others have been hit by quality and leasehold concerns,” the broker said.
“While a chunk of the value gap has now been closed, Barratt remains a well-run business.”