Barratt Developments PLC (LON: BDEV) – Demonstrated flexibility, resilience, and commitment

Formed in 1958, Barratt Developments PLC (LON: BDEV) is a FTSE 100 listed Company, which is engaged in acquiring and developing land. It is also involved in the designing and construction of residential property developments. The Company operates through two segments - housebuilding and commercial developments. It has three housebuilding brands: David Wilson Homes, Barratt Homes, and Barratt London. The Commercial developments are delivered by Wilson Bowden Developments division. The Company builds both private and affordable housing with prices ranging from £70,000 to more than £1m. The Group operates through 6 regions and 27 operating divisions to deliver new homes throughout Britain. It directly employs over 6,500 employees. In FY19, the Company had total completion of 17,856 homes across Britain.

On 2 September 2020, the Company is expected to announce the full-year results for FY20.
 

 
 (Source: Annual Report, Company Website)
 

Key Fundamental Statistics



Industry Outlook Dynamics

The housing market fundamentals remain attractive as the lending environment continues to be positive with a broad spread of lenders supporting homebuyers and greater competition in the mortgage market. Furthermore, the UK Government is planning to extend the Help to Buy equity loan scheme, which will support the growing demand for homebuyers. It will further help people to buy homes when mortgage lenders are reluctant to offer loans without hefty deposits. Meanwhile, as per Robert Jenrick (housing minister), the government is also planning to introduce a simple, faster and people focused system to accelerate the housebuilding with some automatic approval to meet the rising demand. Since 13 May 2020, when the government removed the Government restrictions on housing market activity, there is a substantial recovery in net reservations, site visitors, and internet activity across the industry.

 
 (Source: Presentation, Company Website)
 

Growth Prospects and Risk Assessment

Barratt Developments aims to be the leading national sustainable housebuilder, and it is progressing well towards the medium-term targets. It continues to lead the industry on quality and customer services. The long-term fundamentals of the housing market remain attractive to support the Company’s growth in the future. The Group delivered a strong year of progress on both volume and margin front, prior to the Covid-19 pandemic. Moreover, after the significant disruption of the pandemic, the Company has reopened all the sites and set to begin the new financial year with a well-capitalised balance sheet and strong forward order book. The selling prices remained resilient throughout the FY20, with the total average selling price of approximately £280k (vs £274.4k in FY19).

 
(Source: Presentation, Company Website)

The Group is identified as the largest housebuilder in Britain and is leading the industry in customer service and build quality. The Company is being awarded as HBF 5 Star rating for ten consecutive years by customers. BDEV is the first housebuilder in the UK to set targets based on science and is focused on reducing carbon emissions by one third by the financial year 2025.  The Group has a decent financial position with adequate liquidity and well-positioned balance sheet.

However, the Company has incurred significant additional costs due to the Covid-19, including hibernation and recommencement of activities. Also, the principal risk for the Company includes – volatile housing demand amid weak economic environment, unavailability of land to meet the volumes, inadequate resources to meet the working capital requirements, change in government policies can hinder the planning policy, and the risk arising from dependencies over information technology. The Company’s operational performance could be hampered due to climate change as it may result in project delay or can lead to transition risk.

Segment Analysis

The Company derives revenue from the sale of homes and commercial properties. The Group consists of two separate segments - housebuilding and commercial developments. It operates in a single geographic market, Great Britain.


 (Source: Presentation, Company Website)

Synopsis of Recent Developments

6 July 2020: The Company announced that all sites were reopened by 30 June 2020, and it witnessed a high customer interest levels since sales centres reopened, while the total forward sales were 14,326 homes (30 June 2019: 11,419 homes).

1 May 2020: As of 26 April 2020, the Group had completed 11,776 homes (FY: 11,723 homes), while the total forward sales valued at £2,852.9 million (including joint ventures).

28 April 2020: The Group confirmed the eligibility for access to funding under the Covid Corporate Financing Facility.

Measuring Non-Financial Key Performance Indicators

The Company has been performing on-track in terms of operational targets, which is consistently shown in the FY19 and H1 FY20 results. The details of key performing indicators can be seen in the image below: 


 

(Source: Presentation, Company Website)

Top Shareholders Statistics

Trading Performance with Decent Financial Position (6 July 2020)

The Company has reopened all operational sites on 30 June 2020, and all employees have recommenced working. The Group is focused on ensuring the health and wellbeing of employees and all operations comply with enhanced protocols and practices for covid-19. During the lockdown period, completion volumes including joint ventures have declined significantly to 12,604 total homes for the financial year 2020 (FY2019: 17,856 homes). The Company witnessed a higher level of customer interest on re-opening of sales centres. The net private reservations per active outlet for the last six weeks stood at 0.63 per average week (FY2019: 0.69). The Group’s forward order book remained strong with total forward sales including joint ventures of 14,326 homes as on 30 June 2020 (11,419 homes as on 30 June 2019) at a value of £3,249.7 million (30 June 2019: £2,604.1 million). The Group’s balance sheet remained strong with net cash of approximately £305 million as on 30 June 2020 (30 June 2019: £765.7 million) with land creditors of around £800 million (30 June 2019: £960.7 million).

Financial Highlights for the Period H1 FY2020 (31December 2019)


(Source: Interim Report, Company Website)

In the first half of the fiscal year 2020, the total home completions surged by 9.1% to 8,314 (H1 FY2019: 7,622). Driven by strong forward sales, the company’s revenue grew by 6.3 per cent to £2,266.2 million in the first half of the financial year 2020 (H1 FY2019: £2,132 million). During the period, profit from operations increased by 2.9 per cent to £421.7 million (H1 FY2019: £409.7 million), reflecting higher revenue. Adjusted operating margin increased by 40 bps to 19.4 per cent in the first half of the fiscal year 2020. The PBT (profit before tax) increased by 3.7% to £423 million in the first half of the financial year 2020 (H1 FY2019: £408 million). Basic earnings per share during the period was 33.8 pence (H1 FY2019: 32.7 pence), up by 3.4 per cent. The Company declared a dividend of 9.8 pence per share in the first half of the fiscal year 2020. The net cash for the first half of the financial year 2020 increased by 11.9% to £433.8 million (H1 FY2019: £387.7 million).

Financial Ratios – Strong Profitability and Liquidity Position versus Industry Median

Reported profitability metrics in the first half of the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Barratt Developments Plc has delivered a return on equity of 7.1%, which was in line as compared to the last year comparatives. On the liquidity front, Barratt Developments Plc’s current ratio was higher than the industry median of 3.52x, reflecting sufficient current assets to pay short-term obligations. On leverage front, the debt-equity ratio of the Barratt Developments Plc’s was 0.05x, which was lower as compared to the industry median of 0.11x, reflecting that the company is less leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 3 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On August 3, 2020, at the time of writing (before the market close, at 10:15 AM GMT+1), Barratt Developments Plc shares were trading at GBX 504.60, down by 1.18% against the previous day closing price. Stock 52 week High and Low were GBX 889.20 and GBX 349.40, respectively.

Bullish Technical Indicators

From the technical standpoint, shares were trading above the short-term support level of 100-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Barratt Developments Plc Vs FTSE-100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Barratt Developments share price has delivered a negative 9.06% return as compared to a negative 11.97% return of FTSE-100 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology

Price/Earnings Approach (NTM)


 

To compare Barratt Developments Plc with peers, Price/Earnings multiple has been used. The peers are Glenveagh Properties Plc (Price/NTM Earnings was 18.34), Ibstock Plc (Price/NTM Earnings was 17.17), Persimmon Plc (Price/NTM Earnings was 11.86), LSL Property Services Plc (Price/NTM Earnings was 9.50) and Bellway Plc (Price/NTM Earnings was 8.95). The Average of Price/NTM Earnings of the company’s peers was 13.16x (approx.).

Business Outlook

The Company has shown strong operational performance as per the trading update for the financial year 2020 with a decent financial position. The Group opened all operational sites with enhanced protocols and practices for Covid-19. BDEV experienced a higher level of customer interest on re-opening of sales centres, and forward order book remained strong. The strong performance in the H1 FY2020 helped the Company in volume growth and made decent progress towards medium-term targets and started H2 FY2020 with a well-capitalised balance sheet, strong forward sales, substantial net cash and outlook for the full year stood in line with the management expectations. The Group continues to offer high-quality homes, while supporting economic growth and creating jobs across the United Kingdom. Due to the current economic uncertainties, the land buying activities will remain suspended in the short-term. However, the Group is in a strong position to navigate the period of the unclear economic outlook. It has robust liquidity, well-capitalised balance sheet, and healthy forward sales position to deliver high-quality homes across the country. Moreover, the extended the Help to Buy scheme has been supporting the growth of first-time buyers since the market reopened.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from GBP 3,759.50 million in FY15 to GBP 4,763.10 million in FY19. Compounded annual growth rate (CAGR) stood at 6.09 per cent.

Based on the decent fundamental prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 504.60 (as on 3 August 2020, before the market close at 10:15 AM GMT+1), with lower double-digit upside potential based on 13.16x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).  
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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