Barratt Developments - Lawrie would be proud

Barratt Developments (BDEV.L): More evidence, this time from Barratts, about how great it is to be a house builder right now. In these finals, to 30^th June 2015, revenue was up 19%, driven by a 10.8% rise in completions to 16,447. Operating margins expanded by 230bps to 15.3%, helping pre-tax profits to rise 44.8% to £565.5m with eps up 45.8% at 45.5p. The return on capital employed rose 440bps to 23.9%, with good cash generation helping net cash rise to £186.5m from £73.1m a year ago. This is after committing £957m for 16,956 plots to be added to their land bank. The ordinary dividend is 15.1p, up 46.6%, but the cash bonanza means that there is also a (pre-announced) 10p special, making a total of 25.1p. They comment that the current year has started strongly, with reservations up 14.7% and forward sales up 32.2%.

It might just be worth noting that the group is sporting a new Chairman and CFO, with the new CEO being the old CFO. That is quite a lot of boardroom shuffling in short order and investors will hope that nothing is dropped in the handover. The group’s aim is to hit a 20% gross margin and a 25% ROCE by FY2017 and they appear well on course to do this. They have a detailed cash return plan in place, running for another two years, to FY 2017. In FY 2016 they plan a return of 30.2p, split 17.6p ordinary and 12.6p capital return. Then, in FY2017, they plan 36.9p, being 19.3p ordinary and 17.6p capital return. They state that the ordinary dividend calculations are driven off Reuters consensus eps of 52.7p for FY2016 and 57.9p for FY2017, with a three times dividend cover applied.

The risks are shared by most house builders, especially interest rate rises and inflation (land, materials and labour). However the pent up demand for new houses means that these risks are not immediate threats. Even if UK interest rates rose, it would only be modestly and would be very slow. The main cloud is just that the shares have roughly doubled in price in two years. Yet, at 641p, on the consensus numbers the PE is still only 12.2x dropping to 11.1x, The all-in yield is 4.7% in FY2016 and 5.8% in FY2017, although the ordinary yield is a more mundane (but well covered at three times) 2.7% rising to 3.0%. This all looks pretty good value, although there may be better value to be had in other more niche house builders (such as Berkeley Group). (Neil Cumming^, 9^th September 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower