HSBC reiterates 'Buy' on Barratt Developments despite Brexit risks

Analysts at HSBC revised their target price on shares of Barratt Developments higher on the back of the company's better than expected margins and as it moved to belatedly clear stock in zones one and two in London.

Mark Howson, Matthew Lloyd and Rajesh Kumar said the homebuilder was now winning the 'race against the itself' to cut its exposure to an oversupplied market in central London, especially for units with more than 1,000 square feet.

Now, more than 92% of its London land bank was below £1.0m, HSBC said, and further progress on that front would boost sentiment, it believed.

"That said, the group’s exposure in this more difficult area is not yet cleared, and we await further progress from a company that doesn’t like to talk about this much. Further reducing the exposure will boost sentiment in our view," the analysts said.

Its 20.7% gross margins at the half-year stage had also outpaced its own forecasts calling for 18.1%, HSBC pointed out.

Revised guidance for a total 2017 dividend payout of 39.3p and 40.0p for 2018 meant the prospective dividend yield was over 7%.

"In a world thirsty for income, this is attractive."

On the downside, HSBC saw a risk of a 5% house price/10% volume decline in 2020 on the back of Brexit, althought it added that scenario need not happen.

"In simple terms, our consistent reason for this is to counter investor/our own concerns about a potentially tougher housing market post 2019e, and potential for a real incomes squeeze in Q4 ‘17," HSBC explained.

Yet even discounting those risks the target price was still revised from 543.0p to 598.0p and the recommendation raised to 'Buy'.