- Housebuilder slashes dividend
- Barratt Redrow also cuts guidance for housing completions in new financial year
- FTSE 100 firm also accepts cladding and remediation costs could rise further
- Shares brush off the bad news thanks to new buyback programme
- Stock trades below one times net asset value
“A slashing dividend cut for the year just ended, a reduction in guidance for housing completions for the new financial year just begun and an admission that remediation costs for legacy projects could yet go higher is not a promising mixture at first sight, but shares in Barratt Redrow are up all the same as the housebuilder confirms a £386 million share buyback programme first flagged back in July,” says AJ Bell investment director Russ Mould.
“The shares trade at barely two-thirds of tangible book, or net asset, value, so the company is, in effect, buying assets worth £1 for 68p. The maths stack up, so bulls of the stock will be happy to wait for the housebuilding cycle to turn, while bears will point to the risk of further increases in both interest rates and remediation costs relating to legacy projects.
“Barratt Redrow’s shares hit a 13-year low in spring, to totally erase all of the gains made during the Help to Buy era.
Source: LSEG Refinitiv data
“The profit boom and subsequent slump, as Help to Buy ended, interest and mortgage rates rose from historic lows and input cost growth weighed on margins informs the share trajectory, so the question now for investors is what will cause the cycle to turn again, and when.
Source: Company accounts, Marketscreener, consensus analysts' forecasts. Financial year to June.
“Not surprisingly, Barratt Redrow is calling for greater government support to help the market, even if the lesson of Help to Buy was that boosting demand without boosting supply is a patchy fix at best. Planning deregulation must surely therefore remain at the top of the builders’, and would-be buyers, wish list. After all, house prices are still holding firm, even after a decade of spectacular increases, and Barratt Redrow is trimming its guidance for housing completions in the twelve months ahead to somewhere between 17,500 and 17,900, to imply little or no growth against the year just ended.
Source: Company accounts, Marketscreener, mid-point of company guidance for completions for 2027E. Financial year to June.
“In the meantime, Barratt Redrow continues to hunker down so it can weather the current difficult trading conditions as best it can. As it prepares for Dean Banks to take over as chief executive from David Thomas, the builder continues to integrate Redrow, keep costs under tight control and protect its net cash pile.
Source: Company accounts. Financial year to June.
“A reduction in both purchases of fresh land and inventory on its balance sheet bolsters that cash position, although it may do so at the expense of near-term growth.
Source: Company accounts. Financial year to June.
“Such careful cash management does, however, help to fund the share buyback, which represents 9% of the company’s stock market capitalisation.
Source: Company accounts, Marketscreener, consensus analysts' forecasts. Financial year to June.
“That in turn may provide support to a share price that is already factoring in difficult trading conditions, as reflected in the lowly valuation relative to net asset value per share.
“One residual risk remains that Barratt Redrow has to increase its provisions for cladding remediation and legacy projects, which could knock a hole in both the cash pile and the net asset value calculation.
“This situation remains complex. Barratt Redrow took £149 million in extra provisions in the year just ended, to cover fire safety costs and remedial work on some buildings where the company used reinforced concrete frames and a further 288 sites remain under review. The company did claw back £38 million from sub-contractors and sub-suppliers but this pursuit of those payments via the law courts is not unique to Barratt Redrow, and if anyone further down the food chain gets into financial trouble then it may be harder to claim back further cash. Barratt Redrow still has more than £1 billion set aside to cover remediation work, but that figure could yet move, up or down.
“That uncertainty may be one explanation as to why the shares are quite so cheap relative to net asset value, especially at a time when analysts believe that profits are bottoming out. The old rule of thumb is that housebuilders are cheap when they trade at one times book value or below, and expensive once they trade toward a multiple of two times or higher.”
