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Banking on Berkeley

Berkeley's plan to pay out £13 a share by 2021 looks like a winner for patient investors
December 13, 2012

Shares in Berkeley (BKG) command the biggest premium over net asset value of all the quoted housebuilders, but they still look worth buying. That's because of Berkeley's potential to return cash to its shareholders. It has promised to pay them £13 a share by September 2021 (most of it from 2015 onwards). In crude terms, that works out at 144p a year for the next nine years, equivalent to an annual yield of 8.5 per cent. True, a lot can happen over the next nine years, but it is a measure of Berkeley's quality that, since the start of the financial crash, it has not had to devalue its land bank, has virtually no debt and didn’t tap shareholders for more capital.

IC TIP: Buy at 1691p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Big cash returns promised
  • Simple, effective business model
  • Impressive return on equity
  • Large land bank
Bear points
  • Shares trade above net asset value
  • Relies on London and the south east

Chairman Tony Pidgely has seen it all during his 44 years in house building, and has carved out a successful business model in the housing sector. The beauty is in its simplicity - buy brown-field sites close to London and build expensive flats. Even in relatively unfashionable areas, such as Woolwich Arsenal, the plan has worked well, with many overseas buyers purchasing off plan. And the group has undoubtedly benefited from the Olympic Games because these helped to turn an unfashionable part of East London into an acceptable place to buy a property.

Berkeley also provides down-to-earth accommodation for students, recently finishing a 730-bedroom scheme in Acton. True, a downturn in the housing market in London and the south-east would hit the group, but current trends suggest that this is not about to happen.

In fact, business is booming. Pre-tax profits in the six months to the end of October grew 41 per cent to £142m, and management claims a return on equity of 24.5 per cent. Underlying operating profit margins are the best in the sector at 19.6 per cent, and net asset value rose by 11 per cent to 929p. Berkeley's bosses also feel they can make a start on that £13-per-share cash-back - Berkeley will pay a 15p dividend next April. Their confidence reflects the significant amount of cash due on forward sales of over £1.3bn. Moreover, despite investing £202m securing 1,965 new plots - that’s an average cost per plot of £103,000 - cash inflow of £52m meant that in the past 12 months net debt has fallen from £58m to a nominal £5.5m.

Paying over £100,000 per plot of land may seem a lot, but in the first half of the year sales rose from 1,506 a year earlier to 1,927, and the average selling price jumped from £254,000 to £335,000, boosted by a change in the mix of completions to more expensive homes.

BERKELEY (BKG)
ORD PRICE:1,691pMARKET VALUE:£2.22bn
TOUCH:1,690-1,691p12-MONTH HIGH:1,730pLOW: 1,116p
DIVIDEND YIELD:See textPE RATIO:12
NET ASSET VALUE:929pNET DEBT:£5.5m

Year to 30 AprTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20100.6211060.0nil
20110.7413672.1nil
20121.04215121nil
2013*1.1422312315
2014*1.28260144nil
% change+12+17+17

Normal market size: 2,000

Matched bargain trading

Beta: 0.9

*Northland Capital Partners forecasts

The land bank now comprises 26,370 plots, which Berkeley reckons is worth £2.76bn. And the aim is to bring this up to £3bn by April 2014. Notable purchases in the first half include the former News International site in Wapping for £150m; the plan is to turn the 15-acre site into over 1,000 homes, right on the fringes of the City of London with a waterfront setting.

The delivery of current schemes continues to focus on Berkeley’s seven major projects in London, although management warns that difficulties in establishing exact delivery dates could lead to revenues being a bit lumpy. This year, for example, will benefit from the completion of the development at Chelsea Creek, but no other major completions are anticipated in the period.

Meanwhile, building costs have risen and overheads jumped 37 per cent to £55m. However, a change in the product mix meant that gross margins rose from 28.8 per cent to 29.3 per cent, while overheads as a percentage of gross income actually fell from 9.9 per cent to 8 per cent.