AJ Bell press comment – 12 October 2022
- Barratt’s average weekly rate of private reservations for new houses at active sales outlets down to 0.55
- This comes alongside its increased average selling price (ASP) of £377,200 as well as interest and mortgage rates increases and cost-of-living crisis
- Despite this, management sticking to £200 million share buyback programme and dividend plans
“If government ministers needed any evidence of how policy missteps can affect not just the financial markets but the real economy, then Barratt Developments’ first quarter results statement provided it in spades,” says AJ Bell investment director, Russ Mould. “The average weekly rate of private reservations for new houses at its active sales outlets has fallen to 0.55 in the first three months of its new financial year. That is down from 0.82 across the whole of last year and compares to the lowest annual rate of 0.52 way back in 2012.
Source: Company accounts. Financial year to June.
“Barratt cites increased wider economic uncertainty thanks to the knock to consumers’ confidence and pockets from the increased cost of living, higher interest rates and also a reduction in mortgage availability. All three factors bear the fingerprints of both the government and the Bank of England and the drop in mortgage availability is a direct result of the financial market fall-out which followed the chancellor’s botched fiscal event of 23 September.
“The impact of higher interest rates, and thus higher mortgage rates, will be all the more telling as Barratt continues to report increased average selling prices (ASP). The FTSE 100 firm’s ASP on its order book is now £377,200, nearly 12 times the average UK annual salary flagged by this week’s average weekly wage data released by the Office for National Statistics of £617 including bonuses.
Source: Company accounts. Financial year to June.
“Affordability was already a problem before the demise of Help to Buy, which supported just 12% of sales in the opening quarter of the year. The Government’s proposed changes to stamp duty land tax and 95% mortgage guarantee scheme are designed to help here, but what is really needed is an increase in supply of dwellings that would-be buyers can actually afford.
“Over the past decade, Barratt’s average selling price has increased by 72%. The average UK weekly wage has increased by 33%, so it can hardly be said that Help to Buy has helped. It has boosted demand at a time when financing was cheap, and supply was constrained. Galloping house price inflation means an affordable purchase is an even-bigger stretch now and that is before taking into account how financing is becoming more expensive as the Bank of England belatedly battles inflation.
Source: Company accounts. Financial year to June.
“Despite the drop in reservations activity and a reduction in its forward order book, Barratt is sticking to its forecasts for completions in the year to June 2022. Management also remains comfortable with analysts’ consensus forecasts for profits and is sticking to its £200 million share buyback programme and dividend plans.
“The share price is less convinced, but housebuilders’ valuations are already preparing for a deep downturn in the market, thanks to the combination of bloated house prices, rising mortgage costs and sagging consumer confidence. Only Berkeley and Persimmon now trade at more than one times historic net asset – or book – value per share and the overall sector now trades on a forward price/earnings ratio that is way less than its dividend yield.
|
|
Historic |
2022E |
2022E |
2022E |
|
|
Price/NAV(x) |
PE (x) |
Dividend yield (%) |
Dividend cover (x) |
|
Vistry |
0.48 x |
3.7 x |
14.2% |
1.89 x |
|
Crest Nicholson |
0.54 x |
4.3 x |
9.1% |
2.56 x |
|
Barratt Developments |
0.58 x |
4.3 x |
12.5% |
1.88 x |
|
Bellway |
0.63 x |
4.2 x |
8.5% |
2.81 x |
|
Redrow |
0.69 x |
4.2 x |
8.8% |
2.70 x |
|
Taylor Wimpey |
0.72 x |
5.1 x |
12.8% |
1.55 x |
|
Persimmon |
1.01 x |
5.2 x |
19.6% |
0.97 x |
|
Countryside Partnerships |
1.06 x |
6.3 x |
0.0% |
n/a |
|
Berkeley Homes |
1.13 x |
8.3 x |
7.1% |
1.70 x |
|
AVERAGE |
0.76 x |
5.8 x |
11.1% |
1.71 x |
Source: Company accounts, Marketscreener, analysts’ consensus forecasts, Refinitiv data
“While that may be the market’s polite way of saying it thinks the earnings forecasts are too high or the dividend estimates are too generous, or both, the sector is in much better financial shape than when it last entered a downturn in 2007-09. Then it was saddled with an aggregate debt pile of more than £4 billion whereas at the last count the largest quoted builders have a total net cash pile of £4.7 billion. Whatever storm lies in wait they are much better placed to weather it, especially as dividend and buyback plans can be put on ice to preserve cash, if necessary.”
Source: Company accounts for Barratt Developments, Bellway, Berkeley Group, Countryside Partnerships, Crest Nicholson, Persimmon, Redrow, Taylor Wimpey and Vistry
