House prices look fragile – but Barratt looks cheap

By Associate Editor David Stevenson Sep 14, 2011

David Stevenson

Share with
friends:

Comments (0) Print this article

Britain's biggest housebuilder Barratt Developments (LSE: BDEV) is back in the black. Well almost, anyway. And while the housing market still looks sticky, the firm's future looks better than you might expect.

Stripping out 'exceptional items' – more on this in a minute – the company turned in a £43m pre-tax profit for the year to end-June 2011. That compared with a £33m pre-tax loss last time.

Despite the sluggish state of the UK housing market, average selling prices were up by 7.4%. The operating profit margin in the second half of the year was 8% compared with 5.9% for the first six months.

The net asset value (NAV) has nudged up from 208p to 211p per share. And net debt continues to be slashed: as at 30 June it was £323m. That shows great work by the management. Last year net debt was £367m and back in 2008 it stood at a painful £1.65bn. 
 
But what about those 'exceptionals'? Aren't they just the firm trying to hide nasties, like writing down the value of its landbank? Actually, no. Just a £5m charge was needed for the year – Barratt has already taken £700m-worth of hits to its inventory, which is land plus partly-built houses. Yes, a brand new debt refinancing deal has cost £47m to set up. But the firm is still chuffed about this package as it provides more borrowing facilities that extend as far as 2021.

Further, current trading is going quite well, with 10% more reservations for the first 11 weeks of the current financial years than for the same period in 2010.

So how's the future looking?

Even if property prices fall, Britain will still require more homes. And the country will need firms like Barratt to build them. It will be tough going, not least because mortgage finance is still hard to come by. But the company has cashed in on lower land prices since the Great Recession to bolster its land buying. It now owns enough plots to build almost 5½ years' supply of houses. And because its land cost is lower than before, it will be able make better profit margins.

Our view

We tipped Barratt as a recovery stock exactly a year ago. Since then the share price has veered between 65p and 120p. After the recent market sell-off, it's currently fallen back to 75p.

The stock isn't without risk. If Britain returns to recession, the trading backdrop won't be great. But following the £720m rights issue two years ago, Barratt's finances are on a much firmer, and improving, footing. And on a propective price/earnings ratio for the current year of 10.5, which analysts see falling to just above six over the following 12 months, the bad economic news looks largely 'priced in'.

The dividend - axed in 2008 – won't be making a comeback yet. But restoring it is on the firm's agenda. On a price/NAV of around 0.35 - in other words, you're getting £1 of assets for just 35p - Barratt is now clearly looking cheap.

Comments (0)

Published in Share tips | More articles by David Stevenson

Share with
friends:

Related articles

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>