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Berkeley Group - London stabilising

George Salmon | 17 March 2017 | A A A
Berkeley Group - London stabilising

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Berkeley Group Holdings plc Ordinary Shares

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In a brief trading statement covering the period 1 November 2016 to 28 February 2017, Berkeley confirmed its core London and South East markets have stabilised, and 2017 pre-tax profits are likely to be at the top end of current analyst expectations. The shares rose 5.7% on the news.

Our View

In 2016, the vote to leave the EU, combined with punitive buy to let and stamp duty tax changes, gave the housing market the jitters. However, just as other housebuilders have reassured investors recently, Berkeley's results will have settled some investors' nerves.

Following recent disruption to the housing market, reservations remain around 16% down year-on-year. However, Berkeley says that the market has stabilised after what it described as a 'hiatus' around the referendum, and reported that reservation rates in the early part of 2017 are up against the comparable period 12 months ago. This is certainly encouraging, but we feel that there are plenty of pages left in the post-Brexit chapter of the UK housing market story.

The UK's impending exit from the EU brings particular uncertainty to the London market, which has benefitted in recent years from a flood of international investors. The worry is that if the as yet unknown terms of the UK's exit means London loses some of its appeal as a global financial hub, demand could weaken.

In the longer term however, there are still plenty of supportive factors. Interest rates look likely to remain at historic lows, which should support mortgage affordability. The group's significant forward sales and healthy balance sheet will give investors confidence in the capital returns plans too. The group aims to return £10 per share by 2021, through a combination of earnings enhancing share buybacks and dividends.

The shares trade on a price to book ratio of 1.7 times, a more conservative way of valuing capital intensive business such as housebuilders. That's pretty much bang on their long term average.

Current trading

Reservations are down 16% since the EU referendum, reflecting both the change in stamp duty and uncertainty around the Brexit vote. However the group has seen an improvement since January. Enquiry levels remain robust, cancellation rates are at normal levels and pricing continues to be resilient and above business plan levels.

Berkeley remains confident of meeting its longer-term target of delivering at least £3bn of pre-tax profit over the five years ending 30 April 2021. Forward sales are expected to be in excess of £2.6bn at the year-end (April 2017).

In line with its new policy, Berkeley will be using both share buybacks and dividends in its shareholder returns. Up to this point, the group has acquired £38.5m of shares, and intends to return £117.7m, or 85.24p per share, as a dividend. A further £138.8m is set to be returned in either buybacks or dividends by 30 September.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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