38% Reservation Rate Increase Will Drive Future Expansion

Key Takeaways

• The company’s focus on reservation rate increases and land purchases supports long-term revenue and outlet recovery.
  
• Strategic management of build costs and anticipated synergies from the merger with Redrow aim to stabilize and improve margins.
  
• Declines in home completions, consumer confidence, and land buying, plus merger risks, pressure revenue, earnings, and margins short to mid-term.

Catalysts

Engages in the housebuilding business in the United Kingdom.

• Barratt Redrow is seeing a significant reservation rate increase, with current trading showing a 38% improvement over the previous year, which is expected to drive future revenue growth.
  
• The company anticipates a sharp recovery in outlet numbers by FY '26, combined with robust land purchase activities that have resulted in 12,500 plots approved, supporting long-term revenue expansion.
  
• Through rigorous control of build activities and costs, including a 12% reduction in headcount since September 2022 and recruitment freezes, the company is working to stabilize and potentially improve net margins.
  
• The combination with Redrow is expected to result in significant cost synergies of at least £90 million, which would positively impact net margins and earnings.
  
• The gradual stabilization of build costs alongside strategic price reductions in key materials and supply agreements securing 85% of material needs through December 2024 is expected to maintain or improve earnings and gross margins.

Barratt Redrow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barratt Redrow's revenue will grow by 17.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 9.0% in 3 years time.
• Analysts expect earnings to reach £609.9 million (and earnings per share of £0.43) by about February 2028, up from £114.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 55.0x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 13.6x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.24%, as per the Simply Wall St company report.

Barratt Redrow Future Earnings Per Share Growth

Risks

• The company experienced an 18.6% decline in home completions, impacted by decreased profitability, which could further pressure revenue and earnings if market conditions do not improve significantly.
  
• Current operations face reduced consumer confidence and affordability issues, potentially limiting revenue growth and pressuring net margins.
  
• A forecasted decrease in average sales outlets and continued lower land buying in 2022 and 2023 could constrain future revenue growth opportunities, especially impacting mid-term earnings.
  
• Supply chain challenges, such as reliance on part-exchange and the need for cost management, might squeeze net margins if the anticipated volume growth and cost synergies do not materialize.
  
• The merger with Redrow carries integration risks, and any failure to achieve planned synergies or delays in receiving regulatory clearances may impede profitability improvements and push operating margins lower in the short term.

Valuation

• The analysts have a consensus price target of £5.554 for Barratt Redrow based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £7.6, and the most bearish reporting a price target of just £4.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £6.7 billion, earnings will come to £609.9 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of £4.35, the analyst price target of £5.55 is 21.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.