Barratt relief hinges on Brexit

Let’s call Barratt Developments’ 22% rise since the beginning of the year a long relief rally.

‘Relief’ by any other name

In context, the stock’s 4% advance on Wednesday doesn’t look like just relief. Shares were already up 18% since early January. Investors have been pricing in a favourable look for the half-year that ended on 31^st December 2018 after a clutch of rivals reported pleasing completions and stable prices in the preceding weeks. Still, whilst solid, Barratt’s H1 wasn’t stellar. So, the shares do appear to reflect a measure of satisfaction that Britain’s largest residential developer maintained its typical sure-footed performance in the last half-year before Brexit.

Developers buoyed on Brexit hopes

Relief is usually a short-lived emotion though. With not much more to buy beyond vindicated expectations, the risk to the shares is toppy behaviour over the next few weeks. The convergence by Brussels and London towards a delayed Brexit could continue to buffer property shares and those in other UK sectors widely seen as exposed to the UK’s EU departure. But as repeatedly observed, such underpinnings are hardly stable. With Barratt shares up by a fifth in just five weeks, a pullback would not surprise.

Toppy

Whilst moderate progress across main metrics is being applauded – including a 4.1% rise in completions around the midpoint of BDEV's annual target range – softer details should cap sentiment from here. Chiefly, average selling prices were down 1.8% in the main category and even more, 3%, on affordable homes. Barratt makes no attempt to rebut the appearance of a continuing trend. Earlier-stage data were also adrift: net private reservations were 0.64 per week from 0.68 at H1 2017. Softer still, the affordable category rose 1.3 percentage points faster than 'private'. Further upstream, gross land margin was up 200bp to 22.6% but remained short of the 23% medium-term target. With Barratt otherwise already firing on all cylinders, feasibility of the medium-term target is beginning to look questionable.

Strong, but exposed

There’s nothing here to upset guidance, which passes interims intact. Barratt’s dividend rise also meets expectations. Furthermore, we don’t underestimate the scope for upside across the group in the event of a more benign input from Brexit than worst fears. At this stage though, we suspect investors would prefer if the most exposed residential developer was heading into the next few months with more leeway relative to baseline expectations.