Barratt builds on rising prices: The Investment Column

The good times are back for Barratt, Britain's second-biggest housebuilder. While eschewing talk of a return to the boom days of the late Eighties, the chief executive, Frank Eaton, yesterday spoke of an "extremely positive" outlook after posting a healthy 11 per cent rise in pre-tax profits to pounds 52.1m in the year to June on sales 10 per cent higher at pounds 634m. Earnings per share rose 17 per cent to 17.8p while the dividend was increased by one-tenth to 8.25p.

Unlike most other housebuilders, Barratt continues to increase its sales and profits thanks in part to its adept use of part-exchange schemes, which accounted for 4,000 of the 7,000 completions made during the year.

Barratt has also benefited from its strong regional focus on the South- east in general, and London in particular, where annual house price increases of up to 10 per cent are being seen. This London effect wholly accounted for the rise in average UK selling price to pounds 83,000 from pounds 78,000 a year ago.

Barratt boasts about the virtues of going down the organic route in its quest to build 11,000 houses a year by the end of the century. It noted the departure of many weak operators during the period and, cocking a snook at Wimpey, its larger rival which recently swapped its minerals business for Tarmac's housing activities, Barratt highlighted the problems buyers faced with poor-quality land stocks and high reorganisation costs.

A timely pounds 90m rights issue earlier this year has left the balance sheet free of debt, with net cash standing at pounds 42m. That ought to provide a firm springboard for Barratt to grow its market share from the current 5 per cent level, though history suggests housebuilders cannot sustain a market share much above 10 per cent.

On analysts' pre-tax forecasts of pounds 68m, the shares stand on a forward p/e of 14 with the shares up 6p at 274.5p. Despite the strong performance, the risks inherent in its ambitious expansion plan mean they are high enough.