Overstone Global Equity Fund on Barratt Redrow plc
Thesis
The fund recently bought Barratt Redrow, seeing excessive pessimism in UK housebuilding valuations. The company trades at 0.6 times book despite a 30-year history of average 13% return on equity and 1.2 times book valuation. Its land bank turns over roughly every four years, replacing high-cost plots with land currently bought at margins implying about 23% versus realized margins of 15.3%. Further land price declines and industry exits could also help eventual recovery, while £772 million of net cash protects against a long downturn. The fund expects profits to normalize, perhaps only by decade-end.
“It is this dynamic that makes us confident that at some point Barratt will return to historic rates of profitability”
Key risks
- Higher interest rates and energy costs pressure home buying.
- Build costs could rise without house price inflation.
- An extended housing slump could keep profits low.
- Land bank turnover and profitability recovery may take longer than planned.