The Barratt Developments (LSE: BDEV) share price has tanked this year, as investors have priced in a housing market slump. But the latest numbers from FTSE 100 housebuilder Barratt suggest to me that the shares could offer good value at current levels.
In its latest results, Barratt reported record profits and said that while sales are slowing, the company is already 55% pre-sold for the year to June 2023.
With Barratt shares trading below book value and offering a well-supported 9% dividend yield, I’ve been taking a closer look.
£1bn record profit
During the 12 months to 30 June, Barratt completed 17,908 homes, an increase of 4%. That generated an adjusted pre-tax profit of £1,055m — a new record for the company.
Shareholders will be rewarded with a total dividend of 36.9p for the year. That gives Barratt shares a dividend yield of almost 9%.
This payout doesn’t look stretched to me either. The dividend is covered comfortably by earnings and well-supported by Barratt’s £1.1bn net cash pile.
Looking ahead, the company expects completions to rise by another 3%-5% this year, to around 18,500.
Barratt has already pre-sold 55% of these homes and has a forward order book valued at £3.8bn — around nine months’ sales. That seems reassuring to me.
What could go wrong?
Barratt boss David Thomas admits that new sales are slowing. Since the start of July, sales have been running at around 0.6 reservations per sales outlet, per week. That’s 25% below the 0.8 level seen during the same period last year.
Sales are also slightly lower than during the same period in 2019, before the pandemic.
Barratt faces a few other potential headaches too. The company had to set aside a an extra £396m last year to deal with the costs of making changes to address fire safety risks in older developments.
In addition, Barratt (and its peers) will have to pay an extra 4% tax on profit from this year, due to the new Residential Property Developer Tax. There are also plans for an additional Building Safety Levy from April 2023, which would effectively add a further tax on profits.
Barratt shares: what I’d do now
The big fear for anyone investing in housebuilders is that the UK housing market could crash. Oddly enough, I think a serious crash is unlikely. The situation today isn’t like 2008, when a mountain of unsustainable lending collapsed.
From what I can see today, a more realistic scenario is that sales will slow, and prices will slip slightly to reflect higher mortgage rates and the impact of inflation.
In a situation like this, I think the big housebuilders should survive without too much pain.
Indeed, I think a lot of this risk is already priced into Barratt shares, which currently trade on just five times 2022/23 forecast earnings and offer a forecast yield of more than 9%.
On balance, I think Barratt shares probably offer good value at current levels. I’m looking at the stock as a possible contrarian buy.