Morgan Stanley ups target for Barratt Developments but still a tad cautious

Analysts at Morgan Stanley bumped up their target price for shares of Barratt Developments from 625.0p to 675.0p, following what they termed a "robust" full-year trading update and inexpensive valuation relative to peers, but remained a tad more cautious than the company when looking out to the medium-term.

"Simply" assuming volume growth of 3.0-5.0%, as per the own company's guidance, house price growth in line with inflation and a normalised price-to-earnings multiple of 10, then the shares might rise past 700.0p, equating to more than 20% potential upside, they said.

However, there was another ingredient that would be needed in order to catalyse gains - a broader improvement in confidence.

To take note of, previously analysts Christopher Fremantle and Jonathan Walker had been forecasting negative volume growth of 2.0% for the financial year ending in June 2020, but no longer, given the company's guidance.

Instead, they were now assuming 2.0% volume growth, although that remained Barratt's own guidance.

"Our forecasts remain below volume guidance medium term given our expectation of a slowdown in demand (Exhibit 2),and are still below guidance on margins,given our expectation that flat house prices and sustained cost inflation will offset underlying margin improvement medium term," they said.

Regarding the company's relative valuation, the analysts judged that based on balance-sheet metrics it was the cheapest homebuilder in their coverage universe, changing hands on 1.4 tangible book value with "better earnings momentum,and more room than peers to improve margins and returns, in our view".

Hence their 'overweight' recommendation on the shares.