Redrow results: a handle on Barratt finals?

Barratt Developments, Britain’s biggest housebuilder, reports full-year results on Wednesday after a series of upbeat reports from rivals. Housebuilders rallied on Tuesday on the read across from an upbeat report from Redrow, which saw profits rise 26% over the last year. RDW shares rose c4%, dragging BDEV up c1%, but has this capped any upside for Barratt ahead of its finals?

In a trading update in July, Barratt warned of only modest growth in housebuilding in 2018 despite a strong performance over the last year. But recent results from rivals have outperformed market expectations, so will Barratt alter its outlook or will it remain a touch downbeat?

REDROW RESULTS – POSITIVE MARKER

Redrow delivered very positive final results for the year to the end of June. Group revenue climbed 20% to a record £1.66bn. This was driven by a 15% bounce in legal completions and a 7% increase in average selling prices to £309,800.

Key numbers are all looking impressive. Margins were 50 basis points higher at 19.4%. Pre-tax profits rose 26% to a record £315m. The order book is up 14% to £1.1bn.

In terms of market conditions, overall it remains highly favourable. True political uncertainty and stamp duty rises have affected the volume of transactions. However, the underlying fundamentals remain firmly in favour of housebuilders, at least while the government continues to supply the Help to Buy support.

Robust demand since Brexit means Redrow can afford to up its medium term forecasts, saying it now expects turnover in 2020 to be around £2.2bn and pre-tax profit to be in the region of £430m. This appears positive for others in the sector too.

PERSIMMON

Redrow is not an outlier. Persimmon continued its string of strong interim results with another improvement in half-year numbers last month.

In the six months to the end of June, total revenues rose by 12% year-on-year to £1.662bn, while sales volumes increased by 8% to 7,794 new home legal completions with an average selling price 4% higher at £213,262. Margins rose a whopping 380 basis points to 27.6%.

WHAT TO LOOK FOR IN BARRATT RESULTS

July’s trading update was decent but the outlook less bullish than hoped for. Total completions including joint ventures rose to 17,395. While this was the highest level of completions in nine years, it meant Barratt built just 76 more homes last year than the year before. The total average selling price increased by 5.9% to £275k.

It also expects profit before tax to increase to around £765m (2016: £682.3m). It also expects to make achieve key milestones on gross profit margin (20%) and return on capital (25%), with the latter expected to be above 29%.

However, Barratt was circumspect on its outlook for the year ahead, warning that it expects to deliver only modest growth in wholly owned completions year on year. 

BDEV has risen 7% since the trading update and is now trading at its highest since the start of 2016.

BERKELEY GROUP HOLDINGS

Berkeley Group Holdings is also due to release a trading update on Wednesday. It too has defied the gloom-mongers to record a 53% rise in annual pre-tax profits, which it reported in June. Of note, the high-end builder saw average prices rise 31%.

Berkeley warned of significant headwinds but was broadly upbeat. The market remains ‘under-supplied with low interest rates, good mortgage availability and robust underlying demand’.  A sharp decline in reservations seen after the EU referendum has now ‘fully reversed’. Berkeley reiterated guidance of £3bn in pre-tax profits for the five years to April 2021.

However there is a concern that Berkeley has been able to enjoy the effects of a strong build-up of demand for forward orders in the London market ahead of the referendum. In particular, we note that in its last results the company warned that new starts in falling in London. Given the macro risks and uncertainty it warned that the planning and taxation environments are a threat to the ‘size of Berkeley’s business’ and the speed with which it can deliver new homes.

BOVIS HOMES GROUP

Bovis Homes reports half-year results and the outcome of its strategic review on Thursday. It was the under-achiever in the sector following well-publicised problems with contractors and build quality issues led to a profits warning at the start of the year.  But a turnaround is underway with new CEO Greg Fitzgerald at the helm.

The turnaround means lower volumes and higher margins. At 16%, Bovis margins have badly lagged peers.

Look for any further costs relating to construction quality. In July the company set aside an extra £3.5m to take the total amount to £10.5m.

RISKS

There are number of potential hazards for Barratt and the wider housebuilding sector.

House prices – Although figures from different providers vary, undoubtedly house price growth has slowed in recent months. However housebuilders appear relatively insulated to this trend. Barratt average prices are about +5% higher in the last year, having risen by an average of c10% the year before, yet profits are expected to be significantly higher.

Skills – Barratt pinned its modest outlook largely on the lack of skills. Redrow has also noted an “industry-wide shortage of skills to meet our build programmes”. Whilst there is a tendency to link this to Brexit this is deeper-rooted problem, although one that will not be helped by Britain’s exiting the EU.

Land – Barratt eased off the land buying gas immediately post-Brexit but stepped it up again from September of last year. It still has 4.5 years’ of land. Redrow warned of stalled planning reforms beginning to harm activity. Berkeley highlighted planning and taxation rules as the big threat to its business.

Rates – There is a risk that interest rates may rise but the Bank of England does not appear ready to push up its benchmark rate at any time in the near future. Even when it does, rates will remain materially lower than they have been historically.

Help to Buy – Worries about the removal of Help to Buy assistance in August spooked investors but seem to be unfounded. This remains a key policy of the Conservative government and Labour has also pledged support for a similar scheme. 

SHARE PRICE S

Whilst there are risks to the growth in housebuilders, key fundamentals remain supportive and investors have poured back in since taking fright after the EU referendum.

In the last 5 years housebuilder shares have soared. Redrow (+318%), Persimmon (+277%) and Barratt (+320%) shares have trebled. It’s no coincidence that that the bulk of those gains have come the government launched the Help to Buy equity loan scheme in April 2013. Bovis (+116%) and Berkeley (+157%) have underperformed relative to peers over the 5-year stretch.

Housebuilders are enjoying a very accommodative environment – rising demand, undersupply of new homes, ultra-low interest rates and good mortgage availability, and a supportive government policy scheme in Help to Buy.

But we should give them some credit too – by cutting leverage and improving margins they have been able to become more profitable and return more money to shareholders. According to the July update, Barratt only made 76 more houses but profits jumped by about £80m.

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