Berkeley Group Holdings PLC (LON:BKG), the housebuilder focused on London and the southeast of England, has increased its profits guidance.
In its full-year results statement for the year to 30 April 2018, the group increased guidance by £75mln to at least £1.575bn for the two years ending 30 April 2019 and by a similar amount to at least £3.375bn for the five-year period which began on 1 May 2016.
READ: Housebuilder Berkeley says it won't step-up production amid Brexit uncertainty
Pre-tax profit for the year just ended rose 15.1% to £934.9mln from £812.4mln the year before. Revenue dipped a little to £2.70bn from £2.72bn the year before.
The market had been expecting the group to announce full-year profit before tax of around £905mln on revenue of £2.7bn, although UBS was – correctly - a bit more upbeat than the consensus, predicting profit before tax of £935mln on sales of £2.79bn.
During the year, the group completed 3,536 homes, which included more than 10% of London's new private and affordable homes. The average selling price rose to £715,000 from £675,000 the year before.
It ended the reporting period with net cash of £687.3mln, up from £285.5mln the year before. Cash due on forward sales eased to £2.2bn from £2.7bn at the end of April 2017.
Net asset value per share rose 25.9% to £19.59 from £15.56 a year earlier.
The group cautioned that these results reflect a peak for Berkeley, with profitability returning to more normal levels from 2018/19, when profits are anticipated to be around 30% lower. Thereafter Berkeley will target a 20% pre-tax return on equity over the cycle, depending upon the level of cash, which currently includes around £400mln excess due to macro uncertainty, it said.
Berkeley's chairman, Tony Pidgley, said it was telling that some funders and builders are choosing to exit the London market when faced with “the degree of risk and regulation that now confronts development in the capital where macro and political uncertainty, including Brexit, are leading to this caution”.
The chief executive officer, Rob Perrins, said the government interventions that have helped transactions and starts increase nationally, have had little impact in London and the southeast where a number of headwinds continue to constrain the market for many.
“These include property taxation, mortgage regulation and macro uncertainty; however, for those less affected by these factors, this is a good time to buy with the supply of well-located new-build property built to a high standard of quality, well below the required numbers, at the same time as reduced availability on the second-hand market,” Perrins suggested, talking up his book.
“Looking forward, we remain concerned that the impact of recognised skills gap in the UK construction workforce may become more pronounced as the UK exits the European Union. While this is hard to predict, it is a fact that over half of London's site labour comes from the EU. This needs to be addressed by a combination of continued access to EU labour, skills training and innovation in construction if the industry is to achieve its medium-term production aspirations,” Perrins said.
Shares in Berkeley were down 4.5% at 3,951p in mid-morning trading despite, according to UBS, the housebuilder once again delivering above guidance and consensus.
READ: Housebuilder Berkeley says it won't step-up production amid Brexit uncertainty
“Multi-year guidance is raised by £75mln on a cumulative basis (i.e. 5 years to FY21 min £3,375mln PTP [pre-tax profit]) which implies min £640mln in FY19 (cons[ensus] £627mln; UBSE £604mln) and a minimum of around £500mln thereafter. With high profit delivery, gross profit in the land bank declined to £6bn (PY £6.4bn), the total order book (including cash deposits) to £3.1bn (PY £3.7bn) and net cash rose to £687mln (PY £286mln),” UBS noted.
“All of these metrics are consistent with our expectations, although we note that the St Edward JV did not pay a dividend in FY18 despite high profit delivery of over £150mln, which we expect in FY19E,” the Swiss bank added.
The market's adverse reaction to the statement might have been because the previously announced 200p a year dividend (with the option to switch to share buybacks) is unchanged despite strong cash generation.
“Berkeley describes the market as 'steady' and sufficient to deliver the business plan. Fundamentally, however, the market remains constrained by higher taxation and Brexit related uncertainties. Reflecting this, the group has constrained investment in FY18E, focussing on land investment outside of London (out of 12 sites bought, three were in the St William JV and eight outside of London and one in London); however, with a strong balance sheet, the group is ready to invest opportunistically,” UBS observed.
Shore Capital said Berkeley remains financially very strong but the cash position of £687mln appears to contain £400mln that has been deliberately held back from investment due to “macro uncertainty”.
“Berkeley knows better than most when to spend and not to spend on new land & expansion and this would indicate that the board sees tougher times ahead. Other house builders and the market should take note,” Shore said.
“The capital return programme remains intact but has not increased and 600p remains to be returned over the next three years in either cash or buy-backs. This means that Berkeley is offering a yield of around 4.8%, which is low relative to its peers,” the broker added.
“At £500mln PBT [profit before tax], Berkeley makes around 300p of EPS and against a share price of over £41, this makes the shares look expensive at around 14x year 3 – this is a substantial premium to the rest of the sector and taken with the lower yield, this makes the shares look expensive.” Shore said as it revealed it is considering a downgrade from its current 'hold' rating unless the investment analysts’ meeting provides solid reasons to believe that profits are likely to be very materially higher than £500mln.
Profits have peaked
Liberum Capital Markets said it remained impressed at the resilience of Berkeley's profits in spite of a slower London market but added it takes the “guidance of fading returns seriously and therefore see the shares close to fair value”.
“Berkeley has only acquired 3,600 plots in the year that has closed, which only replaces units completed in 2018, compared to 7,200 last year. This reflects the more cautious stance that management refers to in the statement,” Liberum noted.
“Berkeley rightly traded at a significant premium to the peer group as its returns were consistently above average, but that gap is expected to close as returns trend back towards normal levels,” it added.
Russ Mould, the investment director at AJ Bell, said this was a less than ideal start to a big month for results from house builders, whose shares have already been coming under pressure.
“Second-guessing Tony Pidgley, chairman of Berkeley Homes, is usually unwise and investors appear to be taking his forecast that profits have peaked at the house builder more seriously today than when he first made it back in December,” Mould opined.
“Decreases in the forward sales book and housing completions did not stop Berkeley’s profits going up for the year to April, thanks to another jump in average selling prices but prices slipped slightly in the second half, from £719,000 to £715,000 and Mr Pidgley now expects profits to drop by around a third in the year to April 2019.
“Attention will now switch toward the scheduled results statements and trading updates due from Persimmon on 5 July, Barratt on 11 July and Taylor Wimpey on 31 July,” Mould said.
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