Company Reports

Barratt Developments is the U.K.’s largest homebuilder in terms of both revenue and dwelling completions. Barratt aims to distinguish itself from U.K. peers with a sharp focus on build quality. While falling short of delivering durable pricing power, the strategy has been highly effective in bolstering the reputation of Barratt’s three brands—Barratt Homes, David Wilson Homes, and Barratt London—which consistently garner more awards than peer U.K. homebuilders for build quality and customer satisfaction from the U.K.’s National House-Building Council.

We lift our fair value estimate for no-moat Barratt Developments by 6% to GBX 740 following the announcement of its proposed merger with peer U.K. homebuilder Redrow. The mooted deal—the announcement of which overshadowed Barratt Developments’ first-half fiscal 2024 result—promises to deliver a clear leader in the U.K. homebuilding industry, with an estimated market share of around 10% based on home completion volumes. The deal offers strategic cogency and cost synergy benefits. Consequently, we fully expect the deal to ultimately proceed, despite being subject to approvals from Barratt and Redrow shareholders, as well as U.K. antitrust regulatory clearance. With shareholder voting likely to proceed in May 2024, the deal is expected to be completed in the second half of 2024 (calendar year). Barratt’s stock price dropped 5% in response to the merger announcement, with investors ostensibly concerned that synergy capture may ultimately prove more elusive than management’s expectations under the deal. We think investors’ concerns surrounding synergy realization are overblown and view Barratt shares as attractive, trading at a 32% discount to our revised fair value estimate.

Barratt Developments is the U.K.’s largest homebuilder in terms of both revenue and dwelling completions. Barratt aims to distinguish itself from U.K. peers with a sharp focus on build quality. While falling short of delivering durable pricing power, the strategy has been highly effective in bolstering the reputation of Barratt’s three brands—Barratt Homes, David Wilson Homes, and Barratt London—which consistently garner more awards than peer U.K. homebuilders for build quality and customer satisfaction from the U.K.’s National House-Building Council.

No-moat Barratt Developments' shares remain appealing, offering attractive upside of around 22% relative to our unchanged fair value estimate of GBX 700. We think recent U.K. interest-rate dynamics and the late 2023 improvement in sales activity recently disclosed by its homebuilder peers no-moat Persimmon and no-moat Taylor Wimpey bode well for Barratt Development’s earnings outlook throughout the remainder of fiscal 2024 and onward. With U.K. housing market conditions retracing their cyclical nadir in 2023, we continue to expect Barratt’s earnings to bottom cyclically in fiscal 2024. We forecast Barratt to deliver 13,215 homes and a pretax profit of GBP 325 million in fiscal 2024, with earnings to progressively improve thereafter.

Barratt Developments’ fiscal 2023 delivery of 17,206 home completions and full-year pretax profit of GBP 884.3 million tracked our expectations and offered investors little surprise, given that the result had been effectively announced in conjunction with the U.K. homebuilder’s mid-July trading update. Barratt offered sparse incremental detail on its near-term outlook but reiterated the cyclical woes it faces in fiscal 2024. Conditions in the U.K. housing market remain downbeat, with U.K. mortgage interest rates having spiked once more in recent months, responding to a U.K. inflation rate that has proved more stubborn than in many other developed economies. Homebuyer demand remains consequently soft, with Barratt reiterating its cautious outlook for fiscal 2024 sales volume in the range of 13,250-14,250 home completions, representing a 20% year-on-year decline.

Barratt Developments is the U.K.’s largest homebuilder in terms of both revenue and dwelling completions. Barratt aims to distinguish itself from U.K. peers with a sharp focus on build quality. While falling short of delivering durable pricing power, the strategy has been highly effective in bolstering the reputation of Barratt’s three brands—Barratt Homes, David Wilson Homes, and Barratt London—which consistently garner more awards than peer U.K. homebuilders for build quality and customer satisfaction from the U.K.’s National House-Building Council.

Barratt Developments’ July 2023 trading update offered us little surprise, with the no-moat homebuilder effectively issuing its full-year fiscal 2023 result. Barratt expects to deliver full-year fiscal 2023 pretax profit of GBP 881 million when it reports on Sept. 6, in line with our full-year forecast.

The U.K. homebuilders continue to screen attractively despite a fresh look at a number of our key U.K. housing market assumptions and consequent revisions to our financial estimates for most of our U.K. homebuilder coverage. Undoubtedly, U.K. homebuilders are staring down a difficult 2023 where profit margins are coming under considerable pressure from a combination of soaring build cost inflation and the effects of a housing market, which has entered a period of cyclical decline—causing home completion volumes to sharply contract and placing pressure on house prices.

Barratt Developments is the U.K.’s largest homebuilder in terms of both revenue and dwelling completions. Barratt aims to distinguish itself from U.K. peers with a sharp focus on build quality. While falling short of delivering durable pricing power, the strategy has been highly effective in bolstering the reputation of Barratt’s three brands—Barratt Homes, David Wilson Homes, and Barratt London—which consistently garner more awards than peer U.K. homebuilders for build quality and customer satisfaction from the U.K.’s National House-Building Council.

Barratt Developments’ May 2023 trading update offered investors further evidence that U.K. homebuyer confidence is progressively recovering in 2023. Barratt’s calendar 2023 year-to-date weekly private sales rate rose to 0.65 homes per sales outlet, implying a solid improvement in recent months that tracks in line with peer performance and represents an approximate doubling of sales activity relative to the final quarter of 2022, when forward orders crashed as U.K. mortgage interest rates jumped. Barratt’s share price has retraced substantial lost ground in recent months, rallying 21% in 2023 year to date. Still, shares in the no-moat stock remain compelling, trading at a 29% discount to our unchanged GBX 710 fair value estimate.

Barratt Developments is the U.K.’s largest homebuilder in terms of both revenue and dwelling completions. Barratt aims to distinguish itself from U.K. peers with a sharp focus on build quality. While falling short of delivering durable pricing power, the strategy has been highly effective in bolstering the reputation of Barratt’s three brands—Barratt Homes, David Wilson Homes, and Barratt London—which consistently garner more awards than peer U.K. homebuilders for build quality and customer satisfaction from the U.K.’s National House-Building Council.

The soured near-term outlook for U.K. house prices remains a distinct challenge to profit margins in fiscal 2023 for no-moat Barratt Developments. Barratt’s first-half fiscal 2023 result provided little surprise, with key details of its first-half performance having been previously provided to the market at its mid-January trading update. Still, Barratt weighed in on the outlook for the remainder of fiscal 2023, confirming our expectations for challenging trading conditions in the second half of fiscal 2023 as the U.K. housing market adjusts to the recent surge in mortgage interest rates.

Barratt Developments’ fiscal-year 2023 guidance has become more cautious amid the presently grim U.K. housing market outlook. Ahead of the release of its fiscal 2023 half-year result on Feb. 8, 2023, Barratt updated the market of a striking slowdown in forward home sales in recent months as U.K. homeowner funding costs surge. We’ve trimmed our full-year fiscal 2023 home completions forecast, with Barratt’s forward order book lighter than typical for the homebuilder as it heads into the second half of its fiscal year. Still, Barratt’s average selling price has fared better in fiscal 2023 to date than we’d previously credited, leading us to upgrade our full-year fiscal 2023 pretax profit forecast by 7% to GBP 884 million, inclusive of joint venture profits. With our long-term expectations for the no-moat U.K. homebuilder intact, we make no change to our GBX 710 fair value estimate. Barratt’s shares continue to screen as materially undervalued, trading at an approximate 40% discount to our unchanged valuation.

Barratt Developments is the U.K.’s largest homebuilder in terms of both revenue and dwelling completions. Barratt aims to distinguish itself from U.K. peers with a sharp focus on build quality. While falling short of delivering durable pricing power, the strategy has been highly effective in bolstering the reputation of Barratt’s three brands—Barratt Homes, David Wilson Homes, and Barratt London—which consistently garner more awards than peer U.K. homebuilders for build quality and customer satisfaction from the U.K.’s National House-Building Council.

We lower our fair value estimates for our U.K. homebuilder coverage in the range of 5%-6% with the U.K. government abandoning its prior plan to introduce a range of unfunded and controversial tax cuts. Consequently, the U.K. corporate tax rate is now set to increase as originally planned to 25% in April 2023, up from a current 19%. Therefore, we increase our long-term effective tax rate assumption for our U.K. homebuilder coverage by 6 percentage points to 29%, inclusive of the 4% residential property developer tax, which came into effect in April 2022. Our revised fair value estimates for no-moat Barratt Developments, no-moat Taylor Wimpey, no-moat Persimmon, and no-moat Berkeley Group are GBX 710, GBX 180, GBX 2,400, and GBX 4,700, respectively. We make no change to no-moat Bellway’s fair value estimate of GBX 3,670, having previously incorporated the increase in its effective tax rate into our financial estimates in conjunction with its fiscal 2022 full-year result on Oct. 18, 2022.

The blow dealt to the U.K. housing market by the recent surge in funding costs has taken nearly immediate effect on Barratt Developments’ fiscal 2023. Forward sales in the first three months of fiscal 2023 have slowed significantly, as homeowners pull back from real estate transactions amid the marked housing market uncertainty brought on by the U.K. government’s debt-funded tax cuts announcement in late September 2022. Barratt and its U.K. homebuilding peers face a challenging near-term macroeconomic environment where soaring mortgage rates for homeowners and an otherwise weakening macroeconomic environment is likely to impose significant near-term pressure on house prices. Against this backdrop, we think Barratt’s revised pretax profit guidance is likely to prove ambitious. Still, we think investors remain overly focused on the near-term cyclical challenges for the U.K. homebuilders while ignoring their long-term fundamentals. Consequently, Barratt shares screen attractively, trading at a steep 57% discount to our unchanged GBX 750 fair value estimate.

We make no change to our fair value estimates for our U.K. homebuilder coverage despite the marked volatility in U.K. fixed-income markets brought on by the U.K. government’s recently announced package of tax cuts. Accordingly, we reiterate our per-share respective fair value estimates for no-moat Barratt Developments, no-moat Taylor Wimpey, no-moat Persimmon, no-moat Bellway, and no-moat Berkeley Group of GBX 750, GBX 190, GBX 2,530, GBX 3,750, and GBX 4,950 respectively. While shares in all U.K. homebuilders under our coverage trade at significant discounts to their unchanged valuations, Bellway remains our top pick. We think Bellway’s market share growth ambitions will deliver partial offset to earnings weakness brought on by cyclical U.K. housing market headwinds now forming.

No-moat Barratt Developments’ delivery of full-year fiscal 2022 operating profit of GBP 1.05 billion—a 15% year-on-year improvement—offered little surprise; the result was preannounced to investors in mid-July 2022. Barratt delivered a 3.9% year-on-year improvement in home completions in fiscal 2023, restoring its home sales volumes to precoronavirus levels. Build cost inflation ran at a rampant 6% in fiscal 2023 due to the spike in U.K. energy prices—which hit on-site construction and building material logistics costs—and rising labour costs. Nonetheless, Barratt’s gross and operating profit margins widened 1.6% and 0.9% respectively to 24.8% and 20.0%, as rapidly rising U.K. house prices drove strong average selling price growth that more than offset build cost pressures.

Barratt Developments is the U.K.’s largest homebuilder, in terms of both revenue and dwelling completions. Barratt aims to distinguish itself from U.K. peers with a sharp focus on build quality. While falling short of delivering durable pricing power, the strategy has been highly effective in bolstering the reputation of Barratt’s three brands—Barratt Homes, David Wilson Homes, and Barratt London—which consistently garner more awards than peer U.K. homebuilders for build quality and customer satisfaction from the U.K.’s National House-Building Council.

Barratt Developments’ late fiscal 2022 performance exhibited all the strength we were expecting, as confirmed by its preannounced full-year fiscal 2022 pretax profit range of GBP 1.05 billion-GBP 1.06 billion. The preannounced result betters our prior pretax profit estimate by about 3%. Fiscal 2022 home completions were modestly short of our expectations, rising 4% year on year compared with our prior forecast for 5%. Nonetheless, Barratt’s updated full-year profit guidance implies that gross margin widened to a greater extent than we’d previously credited. While we await greater detail when Barratt reports its fiscal 2022 in full on Sept. 7, 2022, we think a combination of more favourable second-half land costs than we’d expected and a greater earnings contribution from the recently acquired Gladman Developments account for the stronger-than-anticipated fiscal 2022 showing.