The share price of Barratt Redrow (LSE: BTRW) has surged nearly 10% in early trading this morning (12 February) after an upbeat set of half-year results.
The FTSE 100 housebuilder raised full-year earnings guidance to the upper end of expectations and reported a 23% rise in interim pre-tax profit to £117.2m. It also thrilled investors with a £100m share buyback. Is it now a buy?
It’s been a tough few years for UK housebuilders. Economic uncertainty and sticky interest rates have squeezed buyer demand, while affordability concerns aren’t going away.
Can this underperformer fight back?
Mortgage rates have edging up lately, which wasn’t expected. Although there are signs they’re sliding after the Bank of England cut base rates to 4.5% on 6 February.
Today’s update suggests brighter times ahead. CEO David Thomas said the stabilising economic, political and lending environment has revived customer demand. Reservation activity has been strong since January, signalling renewed confidence.
Thomas said the “significant shortage of homes in the UK” should support prices and demand, despite the uncertain economic outlook.
Barratt’s integration of Redrow is progressing well, apparently. with the combined entity expecting to deliver around 22,000 homes annually in the medium term. The group’s operating margins are forecast to recover to 15%, while it’s targeting a 20% return on capital employed.
Forward sales are still falling though. They stood at 10,903 homes on 2 February, down from 11,460 a year ago. Despite that, the total forward sales value has jumped from £3.13bn in 2024 to £3.35bn. Prices remain resilient, even if they aren’t bombing along as they used to be.
The Barratt Redrow share price is still down 10% over 12 months and a staggering 47% over five years. Inflation and the cost-of-living crisis did much of the damage.
Despite that poor showing, they’re not exactly cheap, with a price-to-earnings (P/E) ratio of just over 15, in line with the FTSE 100 average. The trailing dividend yield is a modest 3.4%.
A so-so valuation and dividend yield
While today’s rally is encouraging, buying the shares now could be risky as profit takers emerge. In fact, the price is retreating as I write this (up just over 6% a little before 10am).
Long-term investors will see an opportunity if they believe the housing market will continue to recover. The UK still has a chronic housing shortage and that’s not going to change. The population keeps growing, while Labour’s housebuilding plans seem challenging, given the shortage of skilled workers.
Much depends on the Bank of England. A more aggressive interest-rate-cutting cycle would speed things up, but that’s not guaranteed. While the UK economy may need lower borrowing costs, the booming US may not.
Barratt has delivered an impressive update, and the market has responded positively. But with economic uncertainty lingering and affordability a challenge, much of today’s good news looks to be reflected in the share price.
For investors willing to take a long-term view, Barratt’s strong fundamentals could make it a compelling buy to consider. But they might want to curb their enthusiasm. We’ve got a long way to go.
