Barratt: Housing Cycle Challenges To Mount in Fiscal 2024, but Long-Term Fundamentals Remain Intact

Barratt Developments’ BDEV 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.

Barratt delivered 17,206 home completions in fiscal 2023, inclusive of joint ventures, just 4% lower year on year despite the dramatic shift in mood in the U.K. housing market since late 2022. Still, fiscal 2024 stands to be a decidedly more challenging year with Barratt expecting to deliver in the range of 13,250-14,250 home completions in fiscal 2024—a 16% year-on-year decline at midpoint. The 2024 volume guidance is as expected given the currently downbeat state of the U.K. housing market, and aligns with our prior expectations for Barratt’s home completion volumes to trough cyclically in fiscal 2024.

Certainly, the near-term housing cycle challenges of pressured house prices and weakened homebuyer demand remain in place for Barratt in 2023. Nonetheless, we continue to assert that investors remain too focused on near-term cyclical challenges and have lost sight of the robust long-term fundamentals for Barratt and its U.K. homebuilder peers. Consequently, Barratt screens as materially undervalued, trading at an attractive 43% discount to our unchanged GBX 710 fair value estimate.

We see a bright decade ahead for Barratt, which sits in contrast with the pessimistic investor expectations implied in the depressed price/book multiples on which the major U.K. homebuilders currently trade.