Overstone International Value Fund on Barratt Redrow plc
Thesis
The fund initiated a position in Britain's largest housebuilder after the weakness in home affordability and completions depressed earnings and valuation. Barratt built 17,700 homes against capacity near 22,000, with realized gross margins of only 15.3%. Over four to five years, expensive legacy land should be replaced by cheaper purchases underwritten at 23% gross margins, potentially restoring profitability by decade-end. Net cash of £772 million supports resilience during the downturn. At 0.6 times book compared with a long-term average of 1.2 times, the fund sees exceptional risk-reward.
“With the valuation at just 0.6x today, we believe Barratt represents exceptional risk-reward.”
Key risks
- Housing affordability is stretched at 7.6 times median income.
- Mortgage rates near 5% depress demand.
- Higher build costs and weak prices may prolong poor margins.
- The land-bank reset may require four to five years.