The trading update issued this morning by UK housebuilder Barratt Developments PLC for the year ended 30 June boasts of continued strong performance. Full annual results are scheduled for publication on 6 September.
- Barratt is the UK's largest housebuilder with total completions including joint ventures (JVs) at 17,395 (2016: 17,319), the highest level of completions in nine years
- Profit before tax is expected to increase to around £765m (2016: £682.3m), ahead of market expectations
- Barratt expects to deliver on the financial targets set in 2014 of 20% gross profit margin and 25% return on capital employed (ROCE) for full year 2017
- Year end net cash balance stood at around £720m (30 June 2016: £592.0m), ahead of guidance, driven by strong performance and the timing of land and working capital payments
Chief executive David Thomas commented: “This has been another strong year for the Group and we continue to drive operational improvements through the business, with a particular focus on improving operating margin.
“In FY18 we expect to deliver modest growth in wholly owned completions year on year.”
But Barratt a 'sell'
Amidst the self-celebratory fanfare, independent broker Liberum declared Barratt a sell. “I think the shares are worth 532p so I would sell at the current price (585.50),” analyst Charlie Campbell told www.capital.com. “I would be a buyer at 450p and a holder at 532p.”
“[Barratt] shares are our least preferred as it has lowest margin amongst returners and shortest landbank, making dividend more risky than at Persimmon and Taylor Wimpey,” he said in a terse note reacting to the news.
Stark Carillion contrast
The contrast with the chaos at UK support services and construction company Carillion could hardly be starker. The companies are not in the same industry peer group but the temptation to compare trading statements issued within two days of each other is strong.
Features of the Carillion statement included
- Deterioration in cash flows on construction contracts
- This combines with a working capital outflow due to a higher than normal number of construction contracts completing and not being replaced by new contract starts
- H1 average net borrowing is now expected to be £695m (Full year: 2016: £586.5m).
- Actions the Board put in place in March 2017 to reduce net borrowing have been accelerated
- Further actions are being taken to reduce net borrowing including
- Disposals to exit non-core markets and geographies to raise up to a further £125m in the next 12 months
- Further annual cost savings to be quantified as part of the strategic and operational review
- 2017 dividends suspended resulting in a cash saving of approximately £80m.
Non-executive chairman Philip Green (not to be confused with Sir Philip Green of BhS and other fame) said: “Richard Howson has stepped down as group chief executive and from the board with immediate effect.
“Keith Cochrane, previously our senior independent non-executive director, will take over as interim group chief executive, while a search is underway for a new group chief executive.”
The balance sheet is a mess
The reaction of analysts at Liberum was as terse and forthright as with Barratt. The Carillion balance sheet is a mess, they say. “And more cash is needed. Disposals should raise a further £125m over the next 12 months.
“There will also be a restructuring with further cost savings to be quantified later. At the moment, we question whether Carillion has the funds to restructure. Carillion is exiting construction projects.
“They are exiting construction markets in Qatar, where there are clearly significant political issues. They will only undertake highly selective future construction, which will clearly be negative for cash since construction has negative working capital.
Significantly more money needed
“Given the weaker profits, higher debt, need for restructuring, limited proceeds from disposals and working capital unwind in construction, we believe that Carillion will need to raise a significant amount of more money,” they conclude.