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Berkeley Group - Strong results, on track to hit future targets

George Salmon | 21 June 2017 | A A A
Berkeley Group - Strong results, on track to hit future targets

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Berkeley Group Holdings plc Ordinary Shares

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Following a positive trading update in March, where the group told investors to expect pre-tax profits to be at the top end of expectations, Berkeley has delivered results slightly ahead of consensus forecasts. The shares rose 2.3% 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 much like other housebuilders, Berkeley has consistently moved to reassure investors.

The group says the London market has stabilised after what it described as a 'hiatus' around the referendum, and that reservations have recovered to 2015 levels. 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.

Management have historically run a tight ship, and Berkeley's expertise in developing sites others find too challenging should serve it well if supply remains constrained.

The group's significant forward sales and healthy balance sheet will boost confidence in the recently re-jigged capital returns plans too. The group aims to return another £8 per share by 2021, which will now be through a combination of earnings enhancing share buybacks and dividend payments.

The shares trade on a price to book ratio of 1.8 times, one of the more conservative ways of valuing capital intensive businesses such as housebuilders. That's only marginally above their long-term average.

Full year results

Over the year to 30 April 2017, Berkeley sold 3,905 homes (up 3.4%) at an average selling price of £675,000, 31% higher than the prior year, reflecting a higher contribution from more premium central London locations.

These factors, combined with a higher contribution from its joint ventures and a net £22.3m reduction in the cost of the group's share schemes, meant 2017 pre-tax profit was £812.4m, up 53%. The group has now delivered £1.3bn of its £2bn pre-tax earnings target for the three financial years to 30 April 2018.

Berkeley continues to target returning £277.7m to shareholders annually out to 2021. For the year to September 2017, £162.1m has already been returned. The group has paid a dividend of £117.7m and has spent £44.4 million on share buy-backs, at an average cost of £28.96 per share.

Berkeley added 16 sites to its land bank, and now has £6.4bn of estimated future gross margin (April 2016: £6.1 billion) across 46,351 plots (April 2016: 42,858 plots). The group ended the year with net cash of £286m, up from £107.4m last year.

Outlook:

The group says the housing market in London stabilised in the second half of the year, following the disruption either side of the EU Referendum, and that reservations for the 2017 calendar year have recovered to 2015 levels. Nonetheless, forward sales have dipped by £500m over the year, and currently stand at £2.7bn.

The group feels that continued uncertainty over Brexit, coupled with the impact of high stamp duty and multiple demands from the planning system in London will ensure housing supply in London will remain constrained, and not reach the levels required.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.