Barratt Developments Plc

The United Kingdom-based Barratt Developments Plc (BDEV) is a holding company engaged in the business of acquiring land, planning, designing, developing, constructing and selling the residential property and commercial property as well. The group's business operations are Housebuilding and Commercial developments. Major brands of the company are Barratt Homes, David Wilson Homes and Barratt London.

Trading Statement (as on 10^th July 2019)
The company announced a trading update for the financial year ended 30^th June 2019 and annual results would be announced on 4^th September 2019. Total homes completed including joint ventures increased to 17,856 homes as compared with the financial year 2018 of 17,579 homes, through wholly-owned completions increased by 2.6 per cent to 17,111 homes against the previous year data. Operating margin surged to 18.9 per cent, with an underlying margin of approximately 70bps, due to the margin initiatives. Profit before tax projected to be increased of market expectations at approximately £910 millionagainst the £835.5 million in FY18, due to the additional contribution from joint ventures, continued solid progress from margin initiatives, and a strong close to the year. For the 10^th year in a row, the company awarded the HBF’s (Home Builders Federation) maximum 5 Star customer satisfaction rating. On 30^th June 2019, total forward sales, including JVs, increased to £2,604.1 millionagainst the £2,175.7 million in FY2018.

Financial Highlights (H1 FY2019, £million)

(Source: Interim Reports, Company Website)

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 H1 FY18, which was in line with the group’s expectations. The revenue increased by 7.2 per cent in H1 FY19 to £2,132 million, up from £1,988 million in the H1 of FY18. The Gross margin improved by 200 basis points to 22.6% in H1 FY19 as compared with 20.6% in H1 FY18. 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. The return on capital employed grew from 28.3 per cent to 29.5 per cent in H1 FY19.

Share Price Performance

Daily Chart as at 29th July 2019, before the market closed (Source: Thomson Reuters)

On 29th July 2019, at the time of writing (before the market close, GMT 9:16 AM), Barratt Developments PLC shares were hovering at GBX 665.6 and increased by 0.544 per cent as compared with the previous day closing price. Stock's 52 weeks High is GBX 670.20 and 52-weeks Low is GBX 430. The company’s stock beta stood at 0.76, reflecting lower volatility against the benchmark index.

Valuation Methodology

(Peers: Taylor Wimpey PLC, Bellway PLC, Berkeley Group Holdings PLC, Bovis Homes Group PLC, Henry Boot PLC, and MJ Gleeson PLC.)

Conclusion
In the current trading statement, the company will report an increase in profits, due to cheap borrowings and government support have boosted the industry. Political uncertainty had been a drag on the market but low unemployment, low-interest rates, and the government’s “Help to Buy” subsidy scheme have all supported the sale of new-build projects. The company also relies on this scheme, which was presented in 2013. The company had reduced its exposure to the struggling central London market, which has seen consecutive years of price falls and slowing transaction numbers. The company aims to sell off its central London portfolio by the end of the year, having decreased it to 18 private homes, from the previous year data.

The home building is well-positioned to deliver a 3% to 5% volume growthover the medium term, land acquisition at a minimum 23% gross margin and expected to deliver 25% Return on Capital Employed (ROCE). However, scheduled departure of Britain from the EU bloc as on October 31, 2019, has invoked the level of economic and political challenges in the near term, but the group has a decent balance sheet with minimal debt contribution in the total capital and healthy forward sales position.

Based on the above rationale and the valuation done using the above method, we have given a “Hold” recommendation at the closing price of GBX 662 (as on 26th July 2019) based on 9.65x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).

Land Securities Group PLC

London Stock Exchange-listed Land Securities Group (LAND) is a holding company. Its area of operations is divided into two categories, Retail portfolio and the London Portfolio. The outstanding market capitalisation of the Holding company stood at £6.08 bn, which ranks it among the large-cap companies listed on the London Stock Exchange and the group is a constituent of the FTSE 100 and FTSE All-Share indices.

Recent News
On 11^th July 2019, the company announced that Chief Executive, Robert Noel, had conveyed his intention to retire from the Land Securities Group PLC in the period 2020.

Financial Highlights (FY2019, £million)

(Source: Annual Report, Company Website)

During the financial year 2019, the group's revenue profit surged to £442 million against £406 million recorded in the year-ago period and recorded a growth of 8.9 per cent on a YoY basis. This was driven by increased rental income and reduction in costs. Before tax-loss expanded to £123 million from a loss of £43 million reported in the FY18. Basic loss per share for FY19 stood at 16.1 pence against the per-share loss of 5.8 pence recorded in the year-ago period. However, on an adjusted basis, the group recorded an earnings per share of 59.7 pence and recorded a growth of 12.4 per cent on YoY basis, this was mainly on account of increased revenue profit and lower shares in issue as compared with the previous financial year. The combined value of the portfolio stood at £13.8 billion and declined by 4.1 per cent or £557 million against the year-ago period. The decline in the portfolio value was mainly because of weaker retail markets. Full Year dividend of the group was up by 3.1 per cent to 45.55 pence.

Share Price Performance

Daily Chart as at 29th July 2019, before the market closed (Source: Thomson Reuters)

On 29th July 2019, at the time of writing (before the market close, GMT 10:25 AM), Land Securities Group PLC shares were hovering at GBX 847.20 and increased by 0.737 per cent as compared with the previous day closing price. Stock's 52 weeks High is GBX 946.90 and 52-weeks Low is GBX 784.14. The company’s stock beta stood at 1.06, reflecting roughly same volatility against the benchmark index.

Valuation Methodology
 

Conclusion
The low levels of activity in the commercial property market have hit the value of some of the United Kingdom’sbiggest landlords. Shares in the company have fallen by around 8 per cent since the end of the first quarter. The company CEO, departure comes after the announced widening losses because of the dropping value of its retail portfolio. A series of retailers having fallen down after struggling with the transition to e-commerce, the higher costs and week pound.  Uncertainty around Brexit and the wider macro-economic environment has put pressure on the stock lately, but the company is financially well-positioned, with strong cash balances, to tackle the challenges. In FY19, the group's reported gross and EBITDA margin of 67% and 67.4% was considerably below the industry median of 82.1% and 69.3%.

The company expect London to remain a thriving international citywith an enduring appeal for businesses, talent, visitors and investors. For real estate companies, this is an exciting time with the insight, capabilities and financial capacity needed to create the spaces for businesses and communities. Ultimately, it is the deep expertise of the employees and partners that will deliver the strategy and create sustainable value for shareholders.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Watch" recommendation at the closing price of GBX 841 (as on July 26, 2019), based on the 13.62x NTM Industry Median Price-to-Earnings per share (approx.) on the FY20E earnings per share (approx.), while we look for any upcoming catalysts.
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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