Overstone Global All Cap Value Fund on Barratt Redrow plc
Thesis
Barratt is a new purchase because the market appears to price in permanently poor UK housebuilding profits. Shares trade at just 0.6 times book versus a 30-year average near 1.2 times. As its land bank turns over in approximately four years, older expensive plots are replaced by cheaper ones; current acquisitions imply 23% margins versus the recent realized 15.3%. Even a worse housing scenario could eventually bring lower land prices and rationalized capacity, while £772 million of net cash provides protection. The managers expect eventual restoration of historical profitability, though it could take longer than hoped.
“Today, the shares trade at 0.6x, back to GFC levels.”
Key risks
- Rising mortgage rates and energy costs hurt demand.
- Building costs could rise without house price inflation.
- Land-price adjustments and restoration of margins may be slow.
- A prolonged downturn would suppress profits and capital growth.