Barratt Developments shares see upgrade to Buy by UBS, driven by acquisition benefits and valuation

On Monday, UBS upgraded shares of Barratt Developments Plc. (LON:BDEV:LN) (OTC: BTDPY), one of the UK's leading homebuilders, from Neutral to Buy, adjusting the price target to GBP6.30 from GBP6.10. The upgrade reflects the firm's view that Barratt's stock is currently one of the lowest valued in its sector, trading at 1.1 times its price to tangible net asset value (P/TNAV), while the sector average stands at 1.3 times, with other large-cap peers ranging between 1.25 and 1.55 times.

The analyst noted that following the acquisition of Redrow, which was completed on August 23, Barratt now has the potential to leverage its scale as the largest homebuilder in the UK. The company boasts approximately 18,000 completions and nearly £6 billion in pro forma revenues forecasted for the fiscal year 2024.

Despite Barratt's recent underperformance in profitability as a standalone entity, the analyst anticipates that the integration benefits and the rebuilding of site counts will present opportunities for the company to improve its financial metrics in the upcoming years.

The new price target of 630 pence implies a total shareholder return upside of approximately 29% for Barratt Developments' shares, signaling a positive outlook for investors based on the current valuation and future potential post-acquisition.

In other recent news, Barratt Developments has made notable strides in the housing market following its acquisition of Redrow. The deal, which led to the issuance of 473 million new Barratt shares, valued Redrow at approximately £2.6 billion. Morgan Stanley resumed coverage on Barratt Developments with an Equalweight rating, reflecting the new business landscape post-acquisition.

These recent developments have positioned Barratt as the largest listed house builder by total completions and revenue. Projections for the combined company in 2023 indicate a 32% increase in completions and a 37% rise in revenue. The gross profit is anticipated to increase by an even larger margin of 52%.

The acquisition is also expected to enhance Barratt's average selling price by 6%, reaching £331,000, due to Redrow's premium brand inclusion. The operating margin for Barratt is projected to improve from 12% to 14%, with further improvements anticipated once the synergies from the acquisition are realized.

InvestingPro Insights

As Barratt Developments Plc. (OTC: BTDPY) navigates the post-acquisition landscape, current real-time data from InvestingPro provides additional context for investors. With a market capitalization of $6.65 billion and a price-to-earnings (P/E) ratio of 22.65, the company appears to be maintaining a stable valuation. Notably, the adjusted P/E ratio for the last twelve months as of Q2 2024 is 14.18, suggesting a more favorable earnings perspective when considering the company's recent performance.

InvestingPro Tips highlight that Barratt Developments holds more cash than debt on its balance sheet and pays a significant dividend to shareholders, with a yield of 5.44% as of the latest data. These factors could be particularly appealing to income-focused investors and those looking for a measure of financial stability in their investments. On the other hand, analysts anticipate a sales decline in the current year, and gross profit margins have been identified as weak. Investors should consider these elements when assessing the company's prospects.

Moreover, the stock has experienced a price total return of 20.67% over the past year, despite recent volatility. For those interested in deeper analysis, InvestingPro offers additional tips on Barratt Developments, providing a comprehensive view of the company's financial health and market potential.

With the next earnings date on September 4, 2024, and an InvestingPro Fair Value estimate of $13.26, closely aligning with the previous close price of $13.14, investors have timely and relevant data to inform their decisions. For further insights, there are numerous additional tips available on InvestingPro that could help investors navigate the complexities of the market.

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