Hold on to Barratt as it rides the housing cycle

Cracks show at Pilkington; Irn-Bru maker Barr looks strong
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The Independent Online

Barratt is often still thought of as a builder of cheap and cheerful "boxes" on uninspiring housing estates for first-time buyers.

Barratt is often still thought of as a builder of cheap and cheerful "boxes" on uninspiring housing estates for first-time buyers.

However, a Barratt home these days could be a £3m house in Surrey or a swanky central London apartment. One of the three biggest in the sector, it still provides some first-time housing but has built an impressive range of homes now for some years.

Over the past decade it has produced 20 per cent annual earnings growth, enduring the last major recession very well.

Yesterday Barratt reported a 23 per cent rise in pre-tax profits to £220m, for the year to 30 June. UK completions were up 8 per cent, with 12,250 homes sold at an average price of £139,000, which was 9.6 per cent higher than last year.

Barratt has a sizeable presence in London but around half its business is in the North of England and it has a small Californian operation. More than 75 per cent of its homes are built on brownfield, or recycled, land, well above the Government target of 60 per cent.

The company's operating margins, at 13.5 per cent, are below the sector average but Frank Eaton, the chairman, points out that on another measure, return on capital employed (ROCE), Barratt scores 31.6 per cent, which is one of the best in the industry. This is because the company pushes through developments faster than competitors, losing out something on price inflation but benefiting on ROCE.

The housing market has been very strong over the last 18 months – a bit too strong for comfort, raising the spectre of a crash. Barratt yesterday became the latest builder to say the market has now slowed to a "sustainable" level but that demand is still very healthy. In the first 11 weeks of the current financial year, Barratt has already sold 60 per cent of its full-year sales target.

Housing shares fell sharply over the summer on interest rate fears but have since partially recovered as it has become clear that rates are on hold. Barratt yesterday closed up 8p to 425p, putting the stock on a sector average forward multiple of 6, which seems about right. Hold.

Cracks show at Pilkington

Is there going to be a dividend cut at Pilkington, the renowned glass maker?

The share price rather suggests there is, since the dividend yield has surged to more than 8 per cent as the shares dived. Pilkington has debts of about £1bn and cash flow has been poor because the group has ploughed money into restructuring. With 12,500 jobs cut over five years, the redundancy costs have added up. On some forecasts, the cash remaining after paying for everything but capital investment won't cover a dividend at last year's level.

But Stuart Chambers, the chief executive, says there are no plans for a cut. Earnings, before interest, tax and write-offs, are usually about five times the cost of the divi, and the debt interest charges are perfectly managable. Unless there is a horrible lurch lower by the global economy, there is no need to cut the payout.

While there are certainly no guarantees, it is clear management want to do everything they can to avoid the symbolic failure of a dividend reduction. The focus has switched markedly from restructuring to cash conservation since Mr Chambers took over, when the fêted Paolo Scaroni was poached to run the Italian energy group Enel in May.

The trouble is, with yesterday's trading statement showing the expected grim trading in all Pilkington's markets outside the UK, there will be little catalyst to drive the stock higher.

This column advised the shares were too risky at 110p in April, and they were still not compelling value at 60.75p yesterday. Avoid.

Irn-Bru maker Barr looks strong

Apparently, the top secret recipe for Irn-Bru, the alarmingly orange fizzy drink, is a blend of 32 flavours that is known only to two board directors of AG Barr, the Glaswegian company which makes it. Robin Barr's great- great-grandfather began making soft drinks in 1875 and the company he founded is still growing strong, with Mr Barr at the helm as executive chairman and the family as a major shareholder.

A tightly held family firm is never going to be a stock market favourite, but AG Barr has a nice dividend and a steady management that has been successfully pushing Irn-Bru and its other brands, including Tizer, which sponsors the Saturday chart show cd:uk.

AG Barr yesterday posted a pre-tax profit of £6.2m for the half-year to 27 July, up from £5.7m the year before. The figure was a little disappointing, partly because a poor summer knocked the fizz out of soft drinks sales, partly because AG Barr has been hit by the vicious war between Pepsi and Coca-Cola (the latter of which has launched new Fanta flavours this year), and partly because the strong pound has made cheap exports from Southern and Eastern Europe more attractive.

These are challenges, but AG Barr's new distributor in Russia has opened up that market for Irn-Bru, and the shares, on a price-earnings multiple of nine at yesterday's 420p, are worth bottling.