Housebuilder Barratt Developments (LSE: BDEV) posted a strong set of half-year numbers today, but warned that its outlook remains uncertain. Barratt’s share price was unchanged in early trading, but has fallen by 25% over the last year.
This tells me that the market anticipated the problems we’re now seeing, which is probably why the shares were flat this morning. I reckon this well-respected FTSE 100 builder could be too cheap to ignore at current levels.
A strong safety net
Today’s numbers look fairly reassuring to me. Barratt went into the second half of last year with a strong order book. The company has been able to convert much of this into cash over the last six months by completing 8,626 homes. That compares to 8,067 completions during the second half of 2021.
Revenue for the six months to 31 December rose by 24% to £2,784m. Pre-tax profit for the period was up 16%, at £502m. That gives a pre-tax profit margin of 18%. Not bad at all.
Shareholders will receive an interim dividend of 10.2p per share. Broker forecasts suggest the total payout for the year ending 30 June could be 34p. That gives Barratt shares a tempting forecast yield of 7.4%.
Although the payout is expected to fall in 2023/24, to maintain a safe level of earnings coverage, forecasts suggest the shares should still yield over 5%. I don’t see this as a big concern as it’s been clearly signposted in advance.
Outlook worrying?
Of course, I can see some clouds on the horizon. Barratt’s order book at the end of December had fallen to 10,854 homes. That’s well below the 15,736 homes on order at the start of 2022.
It could take a while to rebuild the order book, judging from current trading. New home reservations have fallen off a cliff this year and are running 45% below the levels seen in January 2022.
Chief executive David Thomas says that “we have seen some early signs of improvement” during January, but warns investors that it’s too soon to be sure that conditions are improving.
My feeling is that the stock market rally we’ve seen so far this year doesn’t reflect conditions in the real world. I reckon there’s a little more pain still to come from rising interest rates before the housing market stabilises.
However, I don’t think a serious collapse is likely. In fact, I believe that Barratt shares look temptingly cheap at the moment.
Too cheap to ignore?
I’ve increased my exposure to housebuilders in my own share portfolio over the last few months. Today’s results from Barratt support my view that this sector could be attractively valued.
The company reported a tangible book value of 462p per share. That reflects the current value of cash and property assets on the group’s balance sheet.
As I write, the shares are changing hands at 470p. That tells me the stock is trading in line with its book value.
There’s still some risk that market conditions will get worse, both in the stock market and the housing market. But Barratt is a highly profitable business with a strong reputation and good market share.
On a long-term view, I think buying the shares at current levels should deliver attractive returns.
