In the market verdict on today’s updates from housebuilders Barratt Developments (BDEV) and Berkeley Group (BKG), the latter comes out on top with a 1.2% advance to £35.52 while Barratt is flat at 535.6p.
In a first quarter statement ahead of its AGM, Berkeley reiterates its medium-term guidance on profit but also complains of a ‘lack of urgency’ in the London market. Berkeley’s bias is towards higher end properties in the capital and the South East.
For the 12 months to 30 June Barratt posts a 9.2% advance in pre-tax profit to £835.5m with a 5% increase in average selling prices, though it expects selling prices to moderate in the current financial year.
NEW TARGETS SET
New medium-term targets include 3.5% growth per year in housing completions, for new land acquisitions to achieve at least 23% gross margin and a minimum 25% return on capital employed.
Shore capital analyst Robin Hardy reiterates his ‘hold’ recommendation on Barratt. He says: ‘It is good to see Barratt aiming for higher margins and it does need to do this because it has been so far out of line with the peers and having lower margins has made it more vulnerable to falling house prices.
‘The latter is not going to change in the near term and we still see this and the true position of the balance sheet as making Barratt riskier than it peers.’
His counterpart at Canaccord Genuity, Aynsley Lammin stays at ‘buy’ on Barratt with a 670p price target, commenting: ‘There have been no changes to the dividend commitments but management is proposing flexing the special dividend to allow it to buy back shares instead if appropriate - presumably this reflects its frustration with the recent share price performance.
‘We continue to believe the shares look attractive value and sit at an undeserved large discount to the sector.’
Hardy is a seller of Berkeley, arguing the company is too highly valued relative to the sector.
BULL VS BEAR
The divergent opinions on the housebuilders are unlikely to have been altered by these updates as AJ Bell investment director Russ Mould observes. ‘Today's latest results from the housebuilders will do little to settle the argument between bulls and bears over the sector.
‘Bulls could point to the solid earnings still being chalked up by Berkeley and Barratt Developments and their relatively depressed valuations.
‘Bears can highlight that Berkeley feels the need to complain about a 'lack of urgency' in its core London market and the fact Barratt's order book is being propped up by affordable housing and joint venture developments, rather than the core private development sales which account for the bulk of its profit.
‘Speculation over the future of the Help to Buy scheme, which expires in 2021, is also clouding the outlook for the sector. This is unsurprising given how helpful the initiative has been in recent years. Investors may get some clarity on this issue when the Budget is released in November.’
