Extraordinary house prices have provided an excellent safety net for housebuilders over the past two years. For Barratt Developments, a bump in the average sales price of 8 per cent on private homes sold over the 12 months to the end of June means that adjusted pre-tax profits are expected to squeak in ahead of expectations at a record £1.05 billion to £1.06 billion.
House price inflation has masked challenges to profit growth for the big housebuilders and Barratt is no different. Its chief challenge? Rising labour and raw material costs, the pace of which has been startling. Build cost inflation is running at 9 per cent to 10 per cent, almost double the rate recorded over the six months to December last year.
That’s manageable when house prices are also speedily rising. Over the past six months, the heightened level of house price inflation has more than offset higher build costs — but sales price growth is expected to return to more normal levels and the latter is not. Rising mortgage costs and the challenges of saving for a deposit when the cost of living is high mean that the housing market is expected to cool. The result? Barratt’s gross margin is expected to fall this year, against the level that analysts expect the group to report for the last financial year in September.
So you can understand why investors have been spooked. Like peers, the shares are the cheapest they have been since March 2020, priced at just under six times forward earnings. Analysts at Peel Hunt reckon earnings forecasts could be cut by 4 per cent to 5 per cent. And costs aren’t the only challenge Barratt has been grappling with. Ferocious demand over the past 18 months, combined with delays within the planning system, have held back the rate at which new sites have been opened.
Over the past year Barratt operated from 332 sites, down from an average 343 the year before. Sites have increased since then to 352, but planning delays remain.
The upside? Completion volumes last year were almost 4 per cent higher than the previous year and within the company’s 3 per cent to 5 per cent target growth rate. How? Barratt has managed to increase the efficiency with which it builds houses, constructing an average of 352 per week, versus 311 the year before.
Maintaining a decent level of land purchasing means Barratt has been less affected by planning delays than Persimmon, its rival, which has been caught out by historic underinvestment in buying up new plots. Despite a shaky economic outlook, don’t expect Barratt to ease up on land buying: a guidance range of 18,000 to 20,000 new plots for this year would be roughly in line with the 19,000 bought last year.
For any remaining Barratt bulls, the prospect of a cash windfall is the one of two significant attractions of the stock. Net cash stood at £1.1 billion at the end of June, which raises hopes of a special cash return via a special dividend or share buybacks, which would be likely to be announced in September.
A reduction in the level the ordinary dividend is covered by earnings from this year means that investors should be in line for a generous payment. Analysts expect a payment of 38.44p for the year just gone, which would represent a potential dividend yield of 8.4 per cent at the present share price. A forecast dividend of 43.91p a share, equating to a possible 9.6 per cent yield, looks even more tempting.
A cut-price valuation is the second area investors may find alluring, but, with margins looking squeezed, further earnings downgrades could materialise. Investors are right to be more circumspect about Barratt.
ADVICE Hold
WHY Shares are worth holding for a generous dividend, but a cheaper valuation reflects the risk of a fall in earnings
Ashmore
Its share price might look cheap, but Ashmore is in the grip of an earnings downgrade spiral. Why? Whipsawing markets and rising US bond yields have prompted investors to ditch riskier emerging market assets, which for this asset manager — an emerging markets specialist — meant a rise in net outflows to $6.6 billion during the fourth quarter of its financial year and mounting market losses.
So while a forward price earnings ratio of 11 might look appealing, the fact that it far below the ten-year average of 16 makes it less so when you factor in the prospect of analysts cutting their earnings forecasts further. Over the past 12 months analysts have reduced such forecasts for this financial year by more than a third, which are expected to be 16.63p a share, down on the 19.12p that the market expects the asset manager to report when it unveils results for last year in September. Consider more potential cuts to earnings forecasts for this year, say 20 per cent, and Ashmore’s forward earnings multiple rises to 15, hardly bargain basement territory.
More downgrades could materialise over the next 12 months if Ashmore gets stuck in a cycle of poor investment returns that causes institutional investors, which account for about 95 per cent of assets under management, to pull their assets. Analysts at Numis have forecast a decline in assets under management to $61 billion at the end of next June, from $64 billion this year.
A bias towards fixed-income strategies, which accounted for 88 per cent of assets at the end of June, means Ashmore is vulnerable to increased rewards from investing in less risky developed market debt.
Working in its favour is a high level of cash on the balance sheet: this stood at $450 million at the end of December, which should mean the dividend for the 12 months to June this year is held at 16.9p, meaning a potential dividend yield of 8.6 per cent at the present share price.
Bets that Ashmore’s shares will fall further have risen this year, with short interest at 4.1 per cent, placing it among the top 15 most-shorted stocks on the London market. Retail investors should take that as a cue.
ADVICE Avoid
WHY Further earnings downgrades could materialise if more investors cut emerging markets exposure
