Thursday newspaper share tips: Current housing climate makes Barratt a good deal

The Times’ Tempus believed the success of Barratt Developments, especially in the current housing climate, is a good reason to ‘buy’.

The FTSE 100 construction group generated £295m pre-tax profit in the six months to the calendar year end, an increase of 40.3% on revenues that rose 19% to £1.88bn.

Earnings per share were 40.6% higher at 23.9p. Cash generation remained strong, with the group expected to have a net cash balance of more than £250m at the June year end.

So directors were confident to lift the interim dividend to 6p, up 25% on last year's, and trumpet that they expect the capital return plan to generate a special cash payment of £125m with full year results, or 30.5p in total for the year, and for 2017 a further 37.3p in total.

For the first half of the current financial year, the group had already indicated in a trading statement last month that it increased the number of house completions by 9.4% and enjoyed a 10.8% increase in the average selling price.

Barratt said it had made a "strong start" to the second half, though 260 net private reservations per week was down on the exceptional 279 from last year, and the rate of 0.71 reservations per active site per week was flat.

Tempus noted that the company is a big beneficiary of the housing supply shortage as well as the Government’s Help to Buy scheme.

It also pointed out the shares had risen 10 times their value from their low after the 2008 Lehman Brothers collapse.

“That kind of trajectory is impossible to sustain, of course, but there seems no reason why the company should not continue to deliver the kind of profit growth that ought to translate into a rising share price.”

With the need for new homes, Barratt’s great scale and its track record in efficiency gains, Tempus believed this housebuilder is in the best place to exploit the imbalance between supply and demand, rating the shares at ‘buy’.

The column also looked through Weir Group’s latest results and said it’s a company to hold on to.

The FTSE 250 engineering group, which published its results for the 52 weeks to 1 January on Wednesday, saw revenue slide 21% on a reported basis to £1.92bn, from £2.44bn. On a constant currency basis, revenue was down 22%.

Operating profit fell 42% to £259m, with Weir's operating margin down 490 basis points to 13.5%. Its profit before tax was down 46% to £220m. The company had £365m of operating exceptional costs during the year, including a £225m impairment in Oil & Gas.

Earnings per share were down 45% to 78.4p. Weir Group's final dividend was announced at 29p, leaving the year's total dividend unchanged at 44p.

"Despite market challenges which are unprecedented in recent years, Weir has delivered a resilient performance in Minerals, maintained leadership and market share in Oil & Gas, and created an additional platform for growth with the new Flow Control division," said chief executive Keith Cochrane.

Tempus said investors need to be patient, with a few difficult quarters at best, or a cut to the dividend for the first time in 30 years in the worst case scenario.

“However, it was more than twice covered by cash generation last year. The chances are Weir can stave off that threat,” the column said.

With headwinds likely to persist, Tempus advised to ‘hold’ saying it is still a good company.