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of Four developments (LSE: BDEV ) share price has risen this year as investors have priced in a slump in the housing market. But recent numbers from FTSE 100 Homebuilder Bharat suggested to me that the shares could be well valued at current levels.
Barratt reported record profits in its latest results, and while sales have slowed, the company is already down 55% for the year to June 2023.
With Barat shares trading below book value and offering a well-funded 9% dividend, I was taking a closer look.
£1bn record profit
In the 12 months to June 30, Barat completed 17,908 homes, an increase of 4%. That resulted in adjusted pre-tax profits of £1,055m – a new record for the company.
Shareholders will be rewarded with a total dividend of 36.9p for the year. This gives Bharat shares a dividend yield of around 9%.
This fee doesn’t seem to stretch to me either. The dividend is comfortably covered by earnings and, well, Barratt’s £1.1bn of net cash.
Looking ahead, the company expects completions to increase another 3%-5% to 18,500 this year.
Barat has pre-sold 55% of these homes and has a pre-order book of £3.8bn – around nine months of sales. That seems to calm me down.
What can go wrong?
Bharat boss David Thomas has admitted that new sales are slowing. Since the beginning of July, sales have been running at 0.6 bookings per sales position per week. This is 25 percent below the 0.8 level seen in the same period last year.
Sales are slightly lower compared to the same period in 2019 before the outbreak.
Barat also has a few other potential headaches. The company had to set aside an extra £396m last year to cover the costs of making changes to address fire safety risks at older developments.
In addition, Barratt (and his peers) will have to pay an additional 4% tax on profits this year due to the new residential property developer tax. There are also plans for an additional building security levy from April 2023, which will add additional tax on profits.
Barat shares: What to do now
The biggest concern for anyone investing in house builders is that the UK housing market could crash. Ironically, I think a serious accident is unlikely. Today’s situation is not like 2008, when the mountain that does not provide sustainable loans has fallen.
As I see it today, a more realistic scenario is that sales will slow, and prices will slide slightly to reflect higher credit rates and inflation.
In such a situation, I think, the big house makers should live without much pain.
Indeed, I think much of this risk has already been sold into Bharat shares, which currently trade at just five times 2022/23 forecast earnings and yield over 9% of forecasts.
On balance, I think Bharat shares are probably well-valued at current levels. I view the stock as a contrarian buy.