Barratt: U.K. Homebuyer Confidence Continues To Improve in 2023; Shares Remain Attractive

Barratt Developments’ BDEV 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.

With Barratt fully sold for the current fiscal year, we still expect the delivery of volumes near the top end of its unchanged 16,500-17,000 home completion guidance in fiscal 2023. Consequently, our fiscal 2023 financial estimates are largely unchanged and we expect Barratt to deliver fiscal 2023 pretax profit of GBP 882 million, inclusive of joint-venture profits.

We continue to anticipate a testing year ahead for Barratt in fiscal 2024 despite the recent improvement in homebuyer confidence. While Barratt’s sales rate has improved, it remains cyclically depressed, some 30% lower than the year prior. Consequently, home completion volumes are expected to fall substantially in fiscal 2024. Profit margins are also set to come under distinct pressure from a combination of falling house prices and build cost inflation, which remains elevated.

Certainly, near-term cyclical challenges remain for Barratt and its homebuilder peers alike. Nonetheless, our long-term expectations remain unchanged, with profit margin pressures likely to begin to abate from fiscal 2025 onward. Encouragingly, inflationary pressures are beginning to cool with Barratt expecting build cost inflation to fall to 5% in fiscal 2024, down from a searing 9%-10% in fiscal 2023.