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Barratt Developments’ share price at eight-year low as housing demand halves

Barratt advertisement outside a building estate

With hundreds of mortgage deals having been pulled since the announcement of the UK’s mini-Budget, investors will be looking for any projections Barratt Developments [BDEV] puts forward when it delivers its trading update this week.

Consumer confidence in the housing market had already been falling prior to the release of the mini-Budget. The latest data from the Building Societies Association shows that just 15% of people think now is a good time to buy. Those consumers who think it is not a good time to buy rose from 39% in June to 52% in September.

The survey reflects a range in opinions on where house prices will be in the next 12 months. While 35% of those asked believed that prices will rise, 31% said they will fall, while 27% were unsure. But with mortgage rates now soaring following the mini-Budget, a fall in house prices seems inevitable. This could affect profits and cash for housebuilders, adding pressure on the Barratt share price.

Barratt Developments’ stock is currently trading at its lowest level in around eight years, closing on 7 October at 340p and recording a 52-week low of 317.55p on 29 September. The shares tumbled 55.6% since recording a 52-week high of 765.14p on 4 January, and it’s down 13.5% in the past month.

Impressive 2022 numbers

When Barratt reported its full-year results at the start of September, it painted a fairly upbeat picture. Total completions for the year that ended 30 June were up 3.9% from 2021, to 17,908, and revenue was up 9.5% to £5.27bn. It ended the year with £1.139bn in cash.

Although down from £1.317bn at the end of fiscal 2021, the company was able to increase its dividend payout by 25.5%. It also announced a commitment to return a capital surplus of £200m to shareholders through a buyback scheme. 

“Our financial strength and operational excellence position us well to navigate the macro-economic uncertainties ahead,” Barratt’s CEO David Thomas said in a statement released with the results. The company reiterated that the fundamentals of the housing market remained intact, largely due to good mortgage availability.

The results impressed Hargreaves Lansdown analyst Sophie Lund-Yates, who commended Barratt’s performance in an “amiable” environment. “The current valuation could prove to be an attractive entry point, but only for those prepared to accept those inherent risks,” added Lund-Yates, cautioning that “an economic downturn would hurt all housebuilders.”

Warning signs could be flashing

The impact of the mini-Budget won’t be fully baked into the numbers when the company delivers its trading update for the three months to the end of September this week. Investors are likely to focus less than on sales for the quarter and more on indicators about a future slowdown.

According to Peel Hunt analysts, Barratt’s forward sales will be affected by potential homebuyers holding off on purchases until mortgage rates have stabilised. This could put pressure on the company’s profits and cash.

“Hopefully Barratt has paused land buying, and if so, the group should begin throwing off a lot of spare cash,” the Peel Hunt analysts wrote in a note seen by Proactive Investors. Analysts for the UK investment bank anticipate that Barratt Developments will report full-year revenue of £5.8bn, and adjusted profit of £1.03bn for the year to June 2023.

Reservation rate declines

Investors will also be watching out for any revision in the builder’s full-year completion guidance. In its 2022 earnings, the company announced it was expecting completions to be between 18,400 and 18,800 in fiscal 2023, which would be a year-on-year growth rate of between 2.7% and 5%.

Another number they’ll be keeping an eye on is the reservation rate, which has already been falling. Weekly net reservations per outlet were 0.82 at the end of Q1 2022, but this had fallen to 0.60 in the period to 28 August. The help-to-buy scheme offered by Barratt to first-time home buyers closes to new reservations at the end of October.

If the business gives signals of a downturn, Barratt’s share price could come under further. The stock currently has four ‘buy’ ratings and three ‘hold’ ratings by analysts providing forecasts to MarketBeat. The consensus price target of 640.14p implies a potential upside of 88.3% from the most recent closing price.

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