UBS reckons the market is underestimating the potential of Barratt Redrow PLC (LSE:BTRW).
It has a “buy” rating and a price target of 565p, suggesting more than 50% upside from the current 374p.
The Swiss bank's case rests on steady volumes, improving margins and scope for merger synergies, all set against a share price that looks too gloomy about the outlook for housebuilding.
The numbers themselves, published yesterday, were largely as expected.
Completions in the year to June fell 8% and revenues slipped 2%, but adjusted operating margins rose to 10.7% thanks in part to £20 million of cost savings from the merger, lifting pre-tax profit to £592 million.
The dividend was increased to 17.6p and net cash stood at £773 million, albeit with £1.37 billion still set aside for building safety.
Looking ahead, Barratt Redrow has kept its guidance unchanged at 17,200 to 17,800 completions for this year, which would mean growth of about 5%.
Summer trading has been steady, with private sales rates broadly flat at just over half a unit per site per week and pricing holding firm. Forward sales are 5,403 homes, a shade lower by volume but slightly higher by value at £2.1 billion.
Cost pressures look manageable. UBS sees build cost inflation of only 1–2% and another £45 million of synergies yet to come.
After interest charges, pre-tax profit for the current year is expected to be about £625 million, with net cash of £400–500 million even after £250 million of outflows linked to building safety. The medium-term goal of 22,000 homes a year remains in place.
UBS thinks the market is discounting too harshly the challenges facing housebuilders. With a healthier margin profile, cash generation and scale from the merger, it argues Barratt Redrow deserves to trade higher.