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Berkeley Group back to normal

The London-based housebuilder has reiterated its profit forecasts
December 6, 2019

Ahead of a general election which could prove a critical moment for London-focused housebuilders, interim results for Berkeley Group (BKG) led with the group’s impacts on “all stakeholders”. Look beyond the apprenticeship figures, admirable environmental commitments, and claims that Berkeley built more than a tenth of the capital’s “new private and affordable homes” in the six months to October, and earnings were well down.

IC TIP: Hold at 4,531p

While drastic, the 36 per cent drop in operating profit was anticipated, and reflected the well-flagged decline in house sales and the completion of several major projects. At an average £644,000 per home, those 1,389 sales were also 13 per cent cheaper compared with the prior period, though a shift in the sales mix and flat overheads meant the gross margin lifted from 29.2 to 36.1 per cent.

As Berkeley likes to remind us, longer-term value is created by navigating all stages of the cycle. On that score, this was a solid half-year. Two new large regeneration sites added 3,000 homes in the period, while cash due on forward sales and the estimated future margin on the land bank both edged up. Returns have also been smoothed, as canny management of the share buyback programme allowed both net cash to climb above £1bn and NAV per share to rise 5.2 per cent.

That has left the interim dividend on the cutting room floor, though management is sticking by a target to return £280m to shareholders via distributions and share repurchases each year. This should be supported by a “return of profitability to normal levels”, though a pre-tax return on equity of 18.4 per cent for the period suggests Berkeley is ahead of several peers.

Despite this return to earth, chief executive Rob Perrins was upbeat, hailing a “good start” to the year. In fact, he almost portrayed the prolonged uncertainty around Brexit as an opportunity, noting that “fewer developers are prepared or able to accept the high operational risk of bringing forward new homes, with supply falling as a consequence”.

“Come back in a week” was the verdict of Peel Hunt, which suggested that investors should wait for the result of the election to provide clearer guidance on stamp duty and second home and overseas buyer taxes.

Consensus forecasts are for earnings of 333p per share for the 12 months to April 2020, and 345p in FY2021.

BERKELEY GROUP (BKG)  
ORD PRICE:4,531pMARKET VALUE:£5.7bn
TOUCH:4,528-4,535p12-MONTH HIGH:4,728pLOW: 3,208p
DIVIDEND YIELD:0.3%PE RATIO:11
NET ASSET VALUE: 2,420pNET CASH: £1.06bn
Half-year to 31 OctTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20181.654012467.1
20190.93277176nil
% change-44-31-28-
Ex-div:n/a   
Payment:n/a