Broker snap: Views differ on Barratt's NAV

14th Jul 2010 11:46

KBC Peel Hunt has been bearish on the housebuilding sector for a long time and Wednesday morning's update from Barratt Developments has not persuaded it to change its view, though it does concede things are going better for the company."Update shows Barratt ahead in a number of areas - better margins, higher selling prices and lower debt should all please the market in the very short term," concedes KBC analyst Robin Hardy, who will be upping his earnings estimates for the current year as a result.Hardy still sees house prices heading south and taking confidence with them, "so we see a tough 18 months ahead".Despite the recent sharp correction in the share price - the stock was trading in the high 130s ten or so weeks ago and is at half its 2009 share price high - KBC remains a seller as it sees no fundamental value in the equity."The issue remains for us the poor returns on capital being delivered across the sector as a combination of poor near term margins and the carrying of too high an asset value. On this basis, we still believe that fair value is a discount to NAV [net asset value] not a premium as remains the prevailing view - the value destruction arising from the poor ROCE [return on capital employed] must be reflected somewhere and we believe that it needs to be deducted from the NAV," Hardy argues.The broker finds it surprising that the company has been one of the more active operators in the sector in rebuilding its land bank, given the company's heavy debt burden, but agrees with the strategy, saying "this is the only acceptable way to run a housing business at this point in the cycle and even if selling prices do edge back, there will still be visibility on how margins can be improved."However, the £527m committed has not yet been paid for, Hardy notes."The tone is still upbeat across the sector but as we move into H2 [second half of 2010] we believe that the autumn season will show signs of a weakening market as decisions to buy are deferred due to job fears and prices continue to decline in line with the 1.9% drop we have already seen in H1 from the Halifax index," Hardy predicts."We hold the target at 100p but this could still be reduced," the broker warned.The pre-close statement from Barratt has not changed Panmure Gordon's view of the company, either, as the broker sticks with its "buy" recommendation and 180p target price."In our view, the stock is undervalued, trading on a 50% discount to its 2010E NAV. We reiterate our Buy recommendation and 180p target price," the broker said.The broker is not expecting to alter its full year forecasts much, though the loss before tax figure might be trimmed a tad."The key area of outperformance for Barratt has been cash. The group has ended the year with £375m of debt, significantly better than ours or the market's expectations, which were for around £500m. This demonstrates that Barratt is in a much stronger financial position now and the negative sentiment surrounding the high level or gearing at the business (versus its peers) should now go away," Panmure suggests.On the other hand, the broker acknowledges that "the fact that the group took a lower level of write-downs than its peer group in the last downturn could leave them vulnerable to further impairments should house prices fall again."