Overview
Barratt Developments PLC (Ticker Symbol: BDEV) is Coalville, the United Kingdom based holding company. The group engages in acquiring and developing land, obtaining planning consents, and constructing residential property developments and selling the homes, which is built by it throughout Britain. In 1958, the company was established by Sir Lawrie Barratt. Today, the company is the country's biggest housebuilder and has constructed over 450,000 homes in the past 60 years. In FY 2018, the company delivered 17,579 new homes. The group has more than 6,000 direct employees across 27 divisions throughout Britain, with over 45,000 jobs indirectly supported by the company's operations. In 1968, it was listed on the London Stock Exchange and is a constituent of FTSE 100.
Management
The Board is Chaired by John Allan, CBE, who was appointed as Non-Executive Director in August 2014 and was subsequently appointed as the Group Chairman in November 2014. The current Group Chief Executive Officer is David Thomas. He was appointed as the Chief Executive in July 2015. Before this, he was the Group Finance Director for almost six years. The responsibilities of the Chief Operating Officer & Deputy Chief Executive are held by Steven Boyes, who was appointed as an Executive Director in July 2001 and had the responsibility of operations in the Northern UK.
Segments and Divisions
The group's operations are differentiated in two segments: Housebuilding and Commercial developments. The housebuilding segment is the company's most significant segment and constitutes almost all its revenue, operating in approximately six regions with three consumer brands under it: Barratt Homes, David Wilson and Barratt London. Barratt homes primary operations includes providing homes for first-time buyers across England, Scotland and Wales, while David Wilson focuses on constructing family homes. Barratt London is one of the biggest residential developers in the capital, with a diverse portfolio ranging from apartments and penthouses to riverside communities and mixed-use regeneration schemes. Wilson Bowden is a part of Commercial developments segment and focuses on building spaces for activities ranging from industrial and office usage to retail and leisure.
Key Statistics
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Key Financial Metrics (for six months ended 31 December 2018, in £m)
(Source: Company Filings)
Key Financial Highlights (for six months ended 31 December 2018)
The group’s total completions for the period increased by 4.1 per cent in the first half of FY 2019 to 7,622 homes, against 7,324 homes in FY 2018, in line with the group’s expectations. The completions were helped by the company’s new Cambridgeshire division which is now fully operational and will assist in further growth over the medium term. The revenue increased by 7.2 per cent in FY 2019 to £2,132 million, up from £1,988 million in FY 2018. The gross margin also increased by 200 bps to 22.6 per cent vs 20.6 per cent. This reflects the benefits of hurdle rate of a minimum of 23 per cent gross margin used by the company to buy new land. The profit from operations rose by 15.3 per cent to £409.7 million in the first half of FY 2019, against £355.2 million in the corresponding period of FY 2018, while profit before tax increased to £408 million from £342.7 million. The operating margin also rose by 130 bps to 19.2 per cent, reflecting higher gross margins of new land purchased and the benefits of the new product range. The basic earnings per share rose by 20.7 per cent to 32.7 pence. In the first half of FY 2019, an interim dividend of 9.6 pence per share was announced by the company, an increase of 11.6 per cent. The return on capital employed grew from 14.2 per cent to 29.5 per cent since December 2013, with an increase of 120 bps in the last year with the aim of a minimum of 25 per cent over the medium term. The company’s balance sheet remains strong with £387.7 million net cash, against £165.9 million in FY 2018. Net tangible assets also grew by 8.2 per cent to £3,659.5 million from £3,375.5 million in FY 2018.
Ratios
(Source: Thomson Reuters)
Ratios Commentary
The company’s gross margin is less than its competitors. However, the margin has substantially improved for six months and is moving towards the industry median. The EBITDA margin of the company is higher than its peers and improved in the first half of FY 2019. Operating margin has grown in the last six months as well. The group’s net margin is higher than the industry median, indicating better usage of resources. The quick ratio is lower than the industry; however, the current ratio is better, indicating lower cash availability of the company. The company's leverage position is in line with the industry median and has remained stable over the periods. The asset turnover ratio is less than the industry and fell substantially in the first half of FY 2019.
Valuation Methodology
Method 1: Price/Earnings Multiple Approach (NTM)
Method 2: Price to Book Value Multiple Approach (NTM) (Book Value Per Share (FY19E) approximately)
To compare Barratt Developments with its peers, Price/Book has been used. The peers are Bellway PLC (NTM P/B was 1.28), Berkeley Group Holdings PLC (NTM was 1.8),Bovis Homes Group PLC(NTM P/B was 1.38), Persimmon PLC(NTM P/B was 2.3), Redrow PLC(NTM P/B was 1.38), Taylor Wimpey PLC(NTM P/B was 1.78) and Travis Perkins PLC (NTM P/B was 1.28). The median of Price/Book (NTM) of the company’s peers was 1.38x.
* All forecasted figures and peers have been taken from Thomson Reuters.
Share Price Commentary
(Source: Thomson Reuters)
On 28th February 2019, BDEVshare closed at GBX 599, remaining flat against its previous day closing price. Stock's 52 weeks High and Low is GBX 601.40/GBX 430.00. At the closing price, the share was trading 0.4 per cent lower than its 52w High and 39.30 per cent higher than its 52w low. The share achieved its 52w High on that day only. Stock’s average traded volume for 5 days was 4,476,127.00; 30 days - 3,976,126.50 and 90 days - 4,427,655.99. The average traded volume for 5 days was up by 12.58 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 8.7x as compared to the industry median of 8.8x. The company’s stock beta was 0.68, reflecting relatively less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £6.1 billion and a dividend yield of 4.59 per cent.
Risks Assessment and Growth Prospects
The disciplined approach followed by the group, along with strong financials enables it to invest in the business continuously. The group expects volume growth would in line with the current market expectations, albeit towards the lower end of our medium-term target range in FY19. The outlook for FY 2019 is according to the Board's expectations, with a focus on minimum 25% ROCE of new land acquisition and minimum 23% gross margin. The fundamentals of the market are still attractive, underpinned by undersupply of new homes and strong support by the government. The market for mortgage also remains positive with increased competition and availability. Last year, the government announced that Help-to-Buy scheme will remain until March 2021, and will see some tweaks then. The continuation of the scheme will help the industry. The land market remains stable and offers some good opportunities for the company to acquire land at attractive rates that exceed its minimum hurdle rates. The management of the company continues facing pressure on skilled labour supply, which can be further accentuated by Britain's exit from the EU. However, to tackle the problem, the company is improving efficiency and implementing new house-type ranges which takes less time and are easier to build. The company is also using modern methods of constructions. Although the group faces uncertain economic environment due to Brexit, the group financials remains strong with a substantial net cash balance and strong sales position. The group has also worked with its suppliers to ensure continuity of supply of non-UK manufactured components.
Conclusion
While broad-based economic challenges can be seen ahead of the group, the current trading levels indicate a positive movement in the stock with support coming from few growth drivers, specifically from Housebuilding segment. Based on decent fundamental performance indicating a potential for upside, and the valuation done using the above two methods, we have given a BUY recommendation with a high upside potential range based on 9.9x NTM Price/Earnings on FY19E earnings per share and 1.38x NTM Price/Book on FY19E Book value per share.
Note- GBp or GBX are interchangeably used for Pence Sterling.
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