This report is an updated version of the report published on 05 May 2022 at 09:01 AM GMT+1.

Should you Invest in this FTSE 100 Listed House Building Stock - Barratt Developments?

Barratt Developments PLC

Barratt Developments PLC (LON: BDEV) is an 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.

Rationale for Valuation – BUY at GBX 484.40

• Positive Trading Momentum: On 5 May 2022, BDEV released a trading update for the period from 1 January 2022 to 1 May 2022, and reported
  • It expects to report FY22 trading results in line with expectations and unveiled medium-term targets of delivering 20,000 homes a year.
  • The Net private reservations per active outlet per average week for the period was stood at 0.93 (equivalent period in FY21: 0.83)
  • It strengthened the balance sheet further with year-end net cash expected to be between £1.0 billion and £1.1 billion.
• Strong Trading Momentum: BDEV is carrying a positive trading momentum with a strong total forward sale of 15,736 homes as of 30 January 2022 (31 January 2021: 14,289 homes) at a value of £4.11 billion (31 January 2021: £3.43 billion).
• Solid Dividend Growth: The interim dividend attributable for H1 FY22 grew year-on-year by almost 49.3%.
• Decent FY22 Guidance: The Company remained on track to deliver total home completions between 18,000 and 18,250, including 750 JV completions in FY22.
• Technical Indicator: From a technical standpoint, the 14-day RSI (34.92) is approaching the oversold zone, while the price is hovering between the lower Bollinger Band and the middle Bollinger band.

Key Risks

• Increasing Freight rates: Any increase in freight rates could put pressure on the delivery cost, impacting the margins of the company.
• Tightening of Monetary Policy: The Federal Reserve announced an 0.5% increase in interest rates on 04 May 2022. Meanwhile, the Bank of England is expected to raise interest rates to their highest level in 13 years on 05 May 2022. It can lead to a slowdown in inflation in house prices.

Financial Highlights (for the six-month period ended 31 December 2021, as of 9 February 2022)

(Source: Company Website)

• Increase in Profits: During H1 FY22, profit before tax and basic earnings per share jumped 0.6% each against H1 FY21.
• Return on Capital Employed: BDEV had shown a strong increase of 910 basis points in ROCE from 17.7% for H1 FY21 to 26.8% during H1 FY22.
• Strong Balance Sheet: The Group ended H1 FY22 with net cash of £1,131.7 million (H1 FY21: £1,106.7 million).

Share Price Chart

(Data Source: REFINITIV, analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

*Peers: Tyman PLC, Persimmon PLC, Taylor Wimpey PLC, and Vistry Group PLC.

*All selected peers are LSE-listed Companies from the Home Construction industry.

 Conclusion

Based on the decent trading performance, solid growth in interim dividends, and support from the valuation as done using the above method, we have given a “BUY” stance on Barratt Developments PLC at the closing market price of GBX 484.40 (as of 4 May 2022), with lower double-digit upside potential based on 7.04x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

 Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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