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Barratt Interim Results Comment – Still a sell

By Tom Winnifrith | Monday 11 March 2013

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

In February I published a detailed comment on housebuilder and FTSE 250 constituent Barratt Developments (BDEV), stating that a recent upbeat trading statement meant that then upcoming results should contain no nasty surprises but that for a cyclical company seemingly approaching the top of the cycle, the valuation was simply too high. Now, post the results, the following updates my view…

The interim results - for the half year ended 31st December 2012 - were released on 27th February, with pre-tax  profit a touch ahead of what I suggested at £46.1 million and earnings coming in at 3.4p with net debt in line (at £331.7 million). A target “of achieving zero net debt as at 30 June 2015” was emphasised, with the company “on track to deliver significantly increased profitability for this financial year”, though adding “although we remain cautious as to whether the thaw in lending conditions will be sustained, improvements in mortgage lending and the success of the NewBuy scheme have supported a strong start to the 2013 calendar year”.

The debt reduction target and the company’s caution on lending conditions chime with my previously expressed view that I suspect the company shares my bearish medium-term view on the market - if it thought otherwise it would be happy to run at least some gearing to extend its land bank. I would be more than cautious on lending conditions since rising interest rates remain only a matter of time.

Even an increase of 0.5% in base rates would – as it was inevitably passed on to borrowers – see the bills of some fairly stretched interest-only mortgage payers jacked up by 20% or more. That will cause pain and impact lending conditions – the reason why a rise in interest rates is the normal catalyst for a house price correction.

Despite this shares in Barratt are, at a current 241p, up slightly on the 223p they traded at on my previous comment and trade on a PE for the year to June 30th 2013 in the high twenties. However, I note that shares in Bovis (BVS) – which I commented on on the same day - are now lower, as are shares in Redrow (RDW) .

For me, there are further falls to come across the sector.

The current rating allows very little scope for disappointment on the earnings front and for a company operating in a low return on capital cyclical sector such as housebuilding it is just not justifiable. If that was 28 times bottom of the cycle earnings that would perhaps be a fairly priced recovery play. But this is 28 times top of the cycle earnings and as such the stance has to be sell.

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