Expect Barratt to peel away from the housebuilder pack

The split along regional lines between Britain’s large residential property developers appears to be widening

The split along regional lines between Britain’s large residential property developers appears to be widening, looking at Barratt Developments sign-off of another solid year and a statement from Berkeley Group that's touched with foreboding.

Strength in diversity

Broadly speaking, Barratt shows no discernible volatility beyond the norm of the last 5 years, suggesting continued protection due to its more diversified price range and geographic dispersal of projects. Berkeley also sees itself as on track to meet current-year expectations, however, it is moved to highlight uncertainty from Brexit and spotlight still above-average exposure to London, where a slowdown in the market’s pace is unmistakeable. Berkeley’s outlook matches market expectations but no more. It sees profit at least flat on the year and remains on track to meet its five-year pre-tax target of at least £3bn.

By contrast, expressly pointing to government support of house building, wide availability of attractive mortgage finance, alongside Help to Buy, Barratt says consumer demand remains robust. Expectations for the current year intact, Barratt notes total forward sales were up 13.8% year on year, as of a few days ago at about £2.75bn; pricing progress continues after ASPs rose 6%-8%; and that selective mix changes and efficiency fine tuning enabled margin momentum to continue—up 1.1 points to 20% in core housebuilding.

London effect

Barratt does concede difficulties continue to emerge at the leading edge of house price deflation, and that’s why its shares have not been spared the sell-off around the sector on Wednesday. Barratt sees no let-up in the ‘London effect’ for the current financial year, citing headwinds in the central London market as one reason for a 63.4% collapse of profits from JVs and associates.

Barratt’s reaction to rising uncertainty has been to instigate increasingly nimble cash management (year-end balance £723.7m vs £592m). That combined with the maintained outlook enable, in our view, the easiest guess for the large house builder stock on which selling has probably run too far. Furthermore, to the benefit of Barratt, we expect the stock’s participation in the rise of c.30% a piece by a group of close peers including Berkeley, Bellway and Bovis to look increasingly incongruous.

On UK housebuilders overall, we still struggle to be as pessimistic as investors are becoming, according to eye-catching sell-offs over the past two months. Even as shares of less London/S. East-exposed builders pull away from metropolitan rivals, we expect uncertainty combined with glaring supply dynamics to continue to wrong foot the most pessimistic views and make any slowdown more glacial than expected.

Thinking with our technical analysis hat on, we may not be inclined to express our less-perturbed-than average view on the stock just yet.

  • So far on Wednesday however, the shares have continued to respect the validated rising trend line off BDEV's Brexit-vote sell-off that bottomed at 317.51p on 6th July last year
  • We therefore see good chances that the shares will again discover support around the trend line or slightly below 
  • On the day of its deepest setback since early August, the stock remained above the 14th August low of 596.38p, at the time of writing. That was the kick-off point of an up leg that culminated at Barratt's latest highs of the year, earlier this week
  • It could take time for momentum to pull out of a steep dive though: visible support beneath the Stochastic Oscillator over the summer may not suffice to contain the decline , which has room to go before becoming over sold


Source: Thomson Reuters and City Index

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