BTRW: Integration Moves And Dividend Raise Will Lift Shareholder Returns

Key Takeaways

• The merger of Barratt and Redrow brings synergies that enhance margins and operational efficiency, improving earnings.
  
• Strategic land bank expansion and strong reservation trends predict increased home completions and future revenue growth.
  
• Integration complexities, planning delays, safety obligations, and operating challenges could pressure Barratt Redrow's margins, earnings, and financial performance.

Catalysts

Engages in the housebuilding business in the United Kingdom.

• The combination of Barratt and Redrow has created opportunities for cost and revenue synergies, with cost synergies upgraded from £90 million to £100 million. This is expected to positively impact net margins in the future.
  
• The focus on integrating the businesses operationally and systematically is expected to streamline operations, reduce costs, and improve earnings, enhancing operational efficiency.
  
• Barratt Redrow is increasing its capabilities to buy larger sites, enhancing its strategic land bank, which could lead to higher revenue from increased home completions in the future.
  
• Stabilization of reservation trends and strong reservation rates, particularly an improvement in year-on-year net basis by 5%, indicates potential for future revenue growth as the housing market stabilizes.
  
• Guidance for full-year home completions has narrowed and moved upwards, suggesting expectations of higher revenue and potential upward revisions to consensus earnings forecasts.

Barratt Redrow Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barratt Redrow's revenue will grow by 13.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 8.7% in 3 years time.
• Analysts expect earnings to reach £584.7 million (and earnings per share of £0.39) by about September 2028, up from £120.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £490.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, down from 41.9x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 13.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

Barratt Redrow Future Earnings Per Share Growth

Risks

• The combination of Barratt and Redrow presents complexities, such as the purchase price allocation and related fair value adjustments, which could pose integration challenges and impact the adjusted operating margin and overall profitability.
  
• Operating margins have been affected by lower completion volumes and changes to the sales mix, leading to a decline in adjusted gross profit and operating profit, which could continue to pressure earnings if not managed effectively.
  
• The land bank has increased in duration due to the current planning environment, and any delays in planning approvals could lead to slower outlet growth and impact future revenues.
  
• There are ongoing financial obligations related to the remediation of legacy buildings and safety provisions, which could affect net margins and free cash flow if costs rise or if additional regulatory requirements are imposed.
  
• The uncertainty and potential implementation of the building safety levy, along with its associated costs, could impact financial projections and margins, presenting a risk to cash flow and financial performance.

Valuation

• The analysts have a consensus price target of £5.213 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 £6.4, and the most bearish reporting a price target of just £4.4.
• 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 £584.7 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 8.4%.
• Given the current share price of £3.55, the analyst price target of £5.21 is 31.9% 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.