Today’s first quarter statement from housebuilder Barratt Developments (BDEV) is getting raspberries from the market, with the shares marked 2.7% lower to 658p. This may reflect some renewed uncertainty over Brexit
The update itself seems pretty robust - even if full year volume growth (number of houses sold) is only expected at the lower end of its medium-term target of 3% to 5%.
Perhaps the most interesting part of the release is the indication that the company will continue to target an improvement in margins without compromising on the quality of its homes.
This marks a contrast with several of its peers, including Bellway (BWY), which yesterday effectively warned on margin performance alongside its full year results.
Bellway chief executive Jason Honeyman told Shares yesterday that while the sector might be ‘reaching the top of the mountain, I don’t expect us to go careering down the other side’.
Nonetheless, Bellway’s guidance on a 'normalisation' of margins seems logical given that house prices are under pressure and costs are rising.
MARGIN PRESSURE
AJ Bell investment director Russ Mould notes: ‘Industry margins are under pressure as house prices stall at the same time as building costs are going up and there are also signs purchasers are using the current uncertainty to haggle more on price or looking for higher specification features in their homes.
‘Yet Barratt is still talking about achieving ‘margin improvements’, crucially without compromising quality - or in other words without building lower calibre houses.
‘Either Barratt has found an approach that has eluded its rivals or it seems likely shareholders will face disappointment at some stage.
‘Particularly if there is any change in the extremely benign market conditions, with high levels of employment, low interest rates, easy availability of mortgages and the Help to Buy scheme continuing to provide support on the side.
‘Brexit is also a key uncertainty for Barratt and its peer group.’
One offshoot of Brexit is an expected general election at some stage. Honeyman says an election could depress sales activity in the short term and says he hopes that if a national poll does take place it comes in November and December when the market would be subdued anyway.
'DETACHED FROM REALITY'
On Barratt Shore Capital analyst Robin Hardy says: 'The rest of the sector is in reverse with the larger players all suggesting that margins have peaked and with close to zero house price inflation there is a double hit of cost inflation not being recovered and a mean reversion in margins where newer sites cannot match the inflation-boosted margins on older sites.
'We still believe that the rating has detached from reality here and Barratt is being given huge credit for promised margin uplift that we do not believe it can deliver.'
