Construction workers might be none too chuffed about it, but Britain’s biggest housebuilder has told them to pick up their tools and go back on site.
From Monday, Barratt Developments is planning to reopen 180 locations across England and Wales — about half of its total — amid a phased return to work as the sector tries to haul itself out of a virus-induced crash.
Not only have builders not been able to work on new homes, but selling their stock has been all but impossible, not least after the government recommended that buyers and sellers put moves on hold. There are predictions that when the housing market opens again prices could tumble by as much as 33 per cent, putting a serious dent in profits.
Barratt Developments completed 17,856 homes last year, selling them for an average of £274,400 apiece. That’s above the average of £252,000 for England last year, according to the Office for National Statistics. This year it has built 11,776.
The company was formed in 1958 by Sir Lawrie Barratt, who died in 2012, and was listed in London in 1968. It builds properties ranging from flats to large houses, but is known for its more affordable homes. Like all housebuilders, it is a highly cash-generative business in normal times, but Barratt is also known for returning capital to shareholders. Before the pandemic, the group had been working to a plan to hand about £2.1 billion back to its owners over the five years to November. Needless to say, the payout has become a casualty of coronavirus: a 9.8p-a-share interim dividend worth about £100 million and due to be paid next week has been cancelled and a special return of £175 million due in November will be reviewed, probably in September. In the calm before this spring’s storm, Barratt shares were yielding more than 8.7 per cent.
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Prior to Covid-19, the investment case for buying into housebuilders was boosted by the government’s Help to Buy cheap loans scheme, which accounts for about 40 per cent of Barratt’s sales. The scheme remains until 2023, but it will make little difference if buyers are unable or don’t want to move.
Will that happen? Early indications — albeit from clearly interested parties — suggest not. A survey by Rightmove, the property website, found that the overwhelming majority of those involved in agreed sales planned to go ahead once lockdown restrictions had eased. Visits to the site are recovering, driven in part by homeowners in London who want to live in more rural locations.
Barratt, whose sales offices are closed, will have suffered a sharp fall in demand, but the builder said at the beginning of the month that prospective buyers were reserving properties in small numbers. It has a forward order book of 12,271 homes, worth close to £2.9 billion, a portion of which must surely fall away as customers’ circumstances change. If Rightmove is on the money, though, most of the deals will go through, possibly over a longer time frame and at reduced prices.
Assuming that the housing market, which also serves the economy through repair, maintenance and improvement work, stays resilient, the case for Barratt remains. The measures it is taking, including putting all land-buying on hold, seem sensible and, with £430 million of net cash and £700 million in undrawn credit facilities, its finances are healthy.
The shares, down 17¼p, or 3.2 per cent, at 517¼p yesterday, are cheap, trading for just over seven times Canaccord Genuity’s forecast earnings. If you believe the housing market will recover, buy them.
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ADVICE Buy
WHY Financially strong, able to sustain a slowdown and well placed to benefit from a recovery
Pearson
Coronavirus has had a big impact on Pearson’s business and not all of it is bad news for the academic publisher.
True, restrictions on movement and the closures of schools, colleges and campus bookstores have slowed the use of its academic course materials, including in its troublesome market in North America. That customers have not been able to turn up in person to sit professional training and driving qualifications has dented revenues at the group’s 20,000 testing centres, whose doors remain shut.
Yet at the same time, the publisher has benefited from a sharp increase in interest in its online learning tools and virtual academies and schools. This is, in part, because of the shutdowns, but also as the move towards online learning accelerates.
Pearson was founded as a construction company in 1844, moving into publishing just over 100 years later. It serves customers in 70 countries and, while it has been transforming itself into a business led by digital publishing and learning, about a third of its revenues come from traditional print titles.
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On the plus side, demand from teachers and students for its digital learning products has been four to five times higher since March than it would usually have been at this time of year. Nor will it have gone unnoticed by investors that, against a backdrop of widespread cuts by others, the company pressed ahead with last year’s final dividend and looks set to continue its payouts.
With Pearson’s balance sheet and financial resources looking healthy, it is clearly in its gift to emerge from this crisis as a net beneficiary in its pursuit of getting growth back into underlying revenues.
As this column has argued before, while Pearson remains a work in progress it is doing the right things to get there, including finding an extra £50 million of cost savings that are expected to come through next year. Pearson’s shares, up 14¾p, or 3.3 per cent, to 464¾p, remain in the doldrums, having lost nearly 44 per cent of their value in the past year. They trade for an undemanding 18.5 times Barclays’ forecast earnings for a dividend yield of 4.5 per cent. Growth should come.
ADVICE Hold
WHY Close to returning to underlying growth and the shares have been weak
