British housebuilder Berkeley Group Holdings PLC (LON:BKG) said it is unable to increase production further and remains cautious with its investments given the slowdown in the property market.
In a trading update for the quarter through February, the group said market conditions in London and the South East have softened due to higher stamp duty on second home purchases, tougher rules on mortgage applications and economic uncertainty.
READ: Berkeley upgrades five-year profit guidance but points to Brexit-driven slowdown
Buy-to-let investors have also been affected by an increase in stamp duty and new rules that mean they can’t offset all their mortgage interest against their profits.
“These factors, together with the changing planning environment and the time and complexity of getting on site following planning approval, mean that Berkeley is currently unable to increase production beyond the business plan levels,” Berkeley said.
The company added: “Berkeley remains cautious in its investment strategy, acquiring land selectively in the trading period, and anticipates cash flow will be broadly working capital neutral over the course of the year as a whole, subject to any large land transactions that might arise before 30 April 2018.”
Shares fell more than 5% to 1,720p in morning trade.
Profit guidance unchanged due to strong forward sales
However, the group left its expectations for pre-tax profit of at least £3.3bn for five years to the end of April 2021, with £1.5bn to be delivered in the two years ending April 30, 2019.
About 60% of the pre-tax profits forecast for the two-year period will be weighted towards the current financial year at £900mln with forward sales above £2bn at April 30.
Berkeley expects net cash at the year-end will be above the half year position of £632.8mln as it holds back investment.
Liberum left its rating on the stock at 'hold' saying: "Consensus reflects guidance so we would not expect to see any changes in estimates, but the clear message is that the group is unlikely to be beating its guidance.
"The shares are on 2.0x book (Dec18E), which is line with the sector, which is cheap given superior returns and track record historically, but as land bought cheaply in 2010-2013 is exhausted, its returns will move back into line with the sector, and London exposure is more widely seen as negative than positive by investors at present - which explains our HOLD recommendation."
Shareholder returns
As previously announced, it will pay a dividend of £76.3mln, or 56.75p per share, on March 23. The rest of the £139.2mln shareholder returns for the six months to March 31, 2018, have been satisfied through share buy-backs of £62.9mln.
For the next six-month period, the company plans to return £139.2mln to shareholders at the end of September through a dividend to be announced in August, taking into account of any share buy-backs. By the end of September, Berkeley will have returned £10.34 of its £16.34 target.
“The fundamentals of the market in London and the South East remain compelling, but the operating environment and its impact on transaction volumes, whilst sufficient for the business plan and five year profit guidance period that ends at 30 April 2021, do not support the step-up in Berkeley's production levels that these markets so badly need,” the group said.
“Our focus is on ensuring we achieve the right planning consents on our long-term regeneration sites, and then working with our partners and stakeholders to bring these through into production."