Barratt Earnings: Cyclical Challenges Abound in Fiscal 2024 but the Long-Term Outlook Remains Robust

Barratt Developments’ BDEV 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.

We continue to stress that investors remain too narrowly focused on near-term cyclical challenges and are effectively ignoring the long-term fundamentals for Barratt and its U.K. homebuilder peers, which remain healthy. While we continue to expect earnings to recover cyclically from fiscal 2025 onward, we’ve trimmed our fair value estimate by 1.5% to GBX 700, having incorporated incremental legacy-building provisions recently announced by Barratt. Barratt shares continue to screen attractively, trading at an appealing 37% discount to our revised fair value estimate.

In addition to weakened housing market transactions, the higher funding costs faced by U.K. homebuyers are also pressuring house prices, working in concert with build cost inflation—which, while having improved in recent months remains elevated in mid-2023—to compress near-term homebuilder profit margins. Reflecting these near-term housing cycle difficulties faced by Barratt, we’ve lowered our fiscal 2024 estimates.