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Berkeley hitting the sweet spot

SHARE TIP: Berkeley (BKG)
April 4, 2012

Admittedly, Berkeley has not been completely immune to the ravages that crippled most of the UK's housebuilders, but it operates in one of the few areas that has shown – and continues to show – the strongest resistance to the downturn, which should mean more rewards for its shareholders.

IC TIP: Buy at 1334p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Profits in 2010 to be doubled in three years
  • Pledge to return £13 a share in dividends by 2021
  • Strong forward sales and land bank
  • Impressive return on equity
Bear points
  • Heavy reliance on the south east
  • Big price premium over net asset value

The company concentrates on building expensive apartments in prime spots in and around London, and has been successful at picking up some sought-after sites such as part of the old Woolwich Arsenal in south London, now regenerated into an upmarket housing estate. A big factor behind its success has been demand for top-quality homes close to the centre of London. Many of Berkeley's customers are rich foreigners who buy flats off-plan, which means they don't wait until a development is finished. Their reasons to buy include providing somewhere safe while their offsprings complete their expensive education at a London college. Buyers are seeing the value of their investment appreciate as demand continues unabated. Berkeley is also signing up to take part in the government's 'New Buy' scheme. True, most of its developments are out of reach – such as the one in Terrace Yard, Richmond, where prices start at £3.25m – but some of its flats aimed at students start at not much over £100,000.

Brisk demand has given Berkeley the confidence to continue buying land, helped by a rise in amounts due on sales already agreed to over £1bn. In the year to end April 2011, Berkeley spent £207m on buying land, up from £85m a year earlier. Since then, a further 15 sites have been acquired in prime locations such as the Albert Embankment, where there are plans to build 242 homes. Other sites acquired in the first half of 2011-12 year include the former Royal Mail sorting depot in Twickenham for 129 homes. And progress at bringing its land holdings through the planning process has been impressive, with seven sites receiving planning consent – so much so that Berkeley's bosses believe the group's land bank is worth £2.5bn once fully developed.

BERKELEY (BKG)
ORD PRICE:1,334pMARKET VALUE:£1.75bn
TOUCH:1,331-1,334p12-MONTH HIGH:1,430pLOW: 1,011p
DIVIDEND YIELD:See textPE RATIO:11
NET ASSET VALUE:771pNET CASH:£14m

Year to 30 AprTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200970212071nil
201061511060nil
201174213672nil
2012*83217394nil
2013*935223119nil
% change+12+29+27

Normal market size: 2,000

Matched bargain trading

Beta: 0.8

*Northland Capital Partners estimates

Operating profit margins for the financial year ending this month are likely to be in excess of 20 per cent, that's nearly double the margins achieved by any other quoted housebuilder. And last year's 15 per cent return on equity – which the group defines as profit before tax to average shareholders' funds – is expected to top 20 per cent this time around.

Berkeley's strong performance has persuaded management to revise its target of doubling 2009-10's £110m profits by 2015. It also means there should be lots of cash to spare. So, although Berkeley does not regularly pay a dividend, its bosses have promised to return £1.7bn in dividends by 2021 – that's around £13 a share. Mind you, there is a bit of a wait, as the first dividend of £4.34 a share won't be paid until 30 September 2015. Another £4.33 is due in September 2018 and the same again in September 2021.

In the market, the shares command a substantial premium over net asset value, but that's hardly surprising given that shareholders stand to see the current cost of buying the shares returned to them in dividends in nine years. Perhaps the major question mark over all this is the timescale. Berkeley's bosses assume that the current sweet spot for niche housebuilders will continue for another decade, but the group's heavy exposure to the south east makes it vulnerable to any fall in demand for top-quality homes in and around London.