Not much has changed in the housing market in London & south-east since Berkeley Group Holdings PLC (LON:BKG) last updated the market in June.
Ahead of its annual general meeting (AGM) today, the company had the proverbial good news and bad news for shareholders.
READ: Berkeley Group slides as it hints of tougher times ahead
It said pricing had remained robust and that there is demand “for good quality, well-located homes that enhance communities and meet the local housing need”.
On the other hand, it said the market lacks urgency and London remains constrained by high transaction costs, restrictive income multiple limits on mortgage borrowing and prevailing economic uncertainty, accentuated by Brexit.
“These headwinds affect all segments of the market from home movers to downsizers and investors alike,” the company’s AGM statement said.
“A functioning housing market, where good new development can deliver much-needed additionality across all tenures, requires conditions for growth and low barriers to entry which are currently absent from the housing market in London and the South East,” it added.
Things can’t be that bad, however, as the company reaffirmed its guidance to deliver at least £3.375bn of pre-tax profits for the five-year period from 1 May 2016, to 30 April 2021, with at least £1.575bn pre-tax profit to be delivered in the two years ending 30 April 2019.
Berkeley said that subject to any large land transactions that might arise before the end of October, it anticipates that net cash at the half-year will be above the financial year-end position of £687.3mln.
Market reaction focuses on Berkeley's gripes
Shares in Berkeley were up 1.1% at 3,548p in early deals despite what Neil Wilson of markets.com pithily described as “some glass-half-empty commentary” from the group.
Wilson said the group trotted out the usual gripes. “It’s hardly a surprise to hear housebuilders want it to be easier to build and for buyers to get mortgages more easily, or for them to complain about stamp duty, but the statement was no more downbeat than expected,” he said.
“Net cash is expected to be higher at the half-year mark than it was at year-end, although we got no details on the number of homes built,” he added.
Shore Capital also noted Berkeley’s “swipe at the political environment” - presumably not a reference to the ‘Help to Buy’ initiative that has been a massive boon to operators in the sector.
The broker said Berkeley “seems to be calling for both a cut in Stamp Duty and a return to risky, even sub-prime lending in order to reverse what it calls a ‘lack of urgency’ in the London housing market”.
“It is interesting that other large house builders in London have a less cautious view of the market and still seem to [be] achieving sales. However, it does describe the market as ‘consistent’ and pricing as ‘robust’ and feels confident enough to be able to re-affirm previous guidance. This does mean that profits are being guided down from the surge levels of FY2017 and FY2018 (£812m and £934m PBT) to towards our estimate of £639mln this year and £505mln next,” Shore said.
The broker rates the shares a ‘sell’, saying the stock still seems to be valued as if the “surge levels” are going to carry on; it’s a strong business but it reckons the shares would be fairly valued at 3,350p.
Liberum stuck with its ‘hold’ recommendation, saying the AGM statement was largely more of the same. The shares trade at 1.7 times projected book value (or net asset value), roughly in line with the sector multiple of 1.6.
Russ Mould, the investment director at AJ Bell, said today’s latest results from the housebuilders will do little to settle the argument between bulls and bears over the sector.
“Bulls could point to the solid earnings still being chalked up by Berkeley and Barratt Developments and their relatively depressed valuations.
“Bears can highlight that Berkeley feels the need to complain about a ‘lack of urgency’ in its core London market and the fact Barratt’s order book is being propped up by affordable housing and joint venture developments, rather than the core private development sales which account for the bulk of its profit," Mould said.
“Speculation over the future of the Help to Buy scheme, which expires in 2021, is also clouding the outlook for the sector. This is unsurprising given how helpful the initiative has been in recent years. Investors may get some clarity on this issue when the Budget is released in November,” he suggested.
#BerkeleyGroup - Trading Statement - No change in current trading, conditions remain challenging. Pricing remains robust and there are opportunities to invest. Medium term guidance reiterated. No surprises. #BKG #HouseBuilder
— Robert Barron, MCSI (@RobBarronInvest) September 5, 2018