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Berkeley Group - Profits up, but London outlook remains uncertain

George Salmon | 20 June 2018 | A A A
Berkeley Group - Profits up, but London outlook remains uncertain

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Berkeley has announced higher full year profits, and upgraded expectations for the coming years.

However, the group also says the London market remains challenging, citing continuing uncertainty over the Brexit process as a particular headwind.

The shares dipped 1.6% on the news.

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Our view

Strong trading has seen Berkeley upgrade profit forecasts twice since December 2017. However, the uncertainty of the Brexit process, combined with punitive buy to let and stamp duty changes, threaten to overshadow what's been a stellar couple of years.

Berkeley has consistently sought to reassure investors. For example, after what was described as a 'hiatus' around the referendum, reservations are recovering from post-referendum lows.

That's encouraging, but there's no getting away from the fact activity levels in London are slowing. We fancy there might be a few pages left in the Brexit chapter of the UK housing market story.

A disorderly Brexit would likely hurt the London property market. While founder and Chairman Tony Pidgley remains confident in the group's long-term prospects, Berkeley's short-term strategy contains a notable degree of caution.

That's clearly something for investors to be aware of, but it's worth remembering management have historically run a tight ship through the cycle. Part of the reason the group is now enjoying high margins is the way it managed the fallout from the last crisis. Long-term, Berkeley's expertise in developing sites others find too challenging should serve it well.

The group's significant forward sales and healthy balance sheet will boost confidence in the capital returns plans too. Since 2011, the group has returned £9.34 per share, and investors can expect another £7, over a sixth of the current market cap, by 2021 to come back through a combination of dividends and share buy-backs. The prospective yield is 4.7%.

The shares trade on 2.7 times book value, one of the more conservative ways of valuing housebuilders. That's well above most of its peers in the sector, and its own historic average.

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Full year results

Revenue of £2.7bn was flat on last year, as a 9.4% fall in the number of completions was offset by a 5.9% rise in the average selling price and the sales of commercial assets including hotel and office, retail and leisure space.

Berkeley sold 3,536 homes at an average selling price of £715,000 last year. While the group says the wider London and the South East market is subdued, reservations have risen 12% and prices remain at or above business plan levels.

The group's core operations delivered an operating profit of £779.6m, up 3.1% on last year. After including a higher contribution from joint ventures, and reflecting further share repurchases during the year, earnings per share rose 21.9% to 550.2p.

Berkeley returned another £2 per share in the 12 months to March 2018, split relatively evenly between dividends over buybacks. Another £1 per share, equal to £139.2m, is set to be returned by September 2018. The group will confirm the dividend element of this on 16 August 2018.

Looking ahead, Berkeley says this year's profits will likely represent a peak near-term performance, and profits are set to fall to more 'normal' levels next year. Nonetheless, pre-tax profit guidance has increased by £75m to at least £1.575bn for the two years ending 30 April 2019. That means longer-term targets, namely cumulative pre-tax profits over the five years to May 2021, have been increased to 'at least £3.375bn'.

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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.