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Will Berkeley Group signal better times for the housing market?

Results are also due from stem cell researcher Reneuron alongside an update from Primark's owner, Associated British Foods

Housebuilding

The penultimate week before the general election might end with tense times, as housebuilders and retailers have updates which will be scrutinised on Friday for signs of a worsening economic climate in the UK.

Berkeley Group Holdings PLC (LON:BKG) has been the gift that keeps on giving, with the housebuilder having attracted investors with a share price that has soared by a third this year, and almost doubled in the past three.

However, with UK mortgage approvals falling to around the lowest level since March, house price growth remaining below the wider level of low inflation and depressed consumer confidence levels, there are plenty of macroeconomic factors in play for a sector that has thrived and shelled out some bumper cash returns in recent years.

Progress at the FTSE 100-listed group and its peers has in large part been down to the supportive backdrop enjoyed by industry of historically low-interest rates, the government’s Help to Buy scheme and a general housing shortage.

Berkeley is one of the sector’s best performers thanks to its solid sales growth, a record for beating earnings targets and the reassurance of its flexible shareholder returns policy.

Friday's half-year results follow a recent four-month update that showed house prices stable at £748,000 although forward bookings were down to £1.8bn from £2.2bn a year earlier.

Management said market conditions in London and the South-East remained “robust” but cautioned that the wider market had been “constrained by high transaction costs and the uncertainty in the macro-political and economic environment”.

This is unlikely to have dissipated as next week's general election nears.

While targeting £3.3bn in pre-tax profit for the six years to April 2025, with profit in each year ranging from £500mln to £700mln, Berkeley, however, has guided to profits dropping by a third this year from last year’s £775mln.

The consensus forecast for current full-year pre-tax profit is £536mln, with UBS predicting £287mln for the half-year, including joint venture income and interest.

UBS's analysts said in a preview: “Considering the timing of results ahead of the UK elections, we don’t think long-term guidance will likely be unchanged by we think short-term FY20 guidance will be raised from the current level of £500mln.”

Berkeley's cash returns will be under scrutiny too, with £280mln or 400p a share pledged for the coming two years, and that has also now been extended to 2025.

ABF looking for a Primark pickup

Primark owner Associated British Foods PLC (LON:ABF) should provide an update ahead of its annual general meeting on Friday, just weeks after publishing its annual results.

Back then the clothing retailer-to-sugar and food maker said the weakness of the pound meant margins would decline in the first half of the current trading year, despite reductions in the cost of goods and overheads.

Sugar, however, is expected to be a sweet spot, benefitting from recovering prices in the EU, while the grocery arm is expected to see another year of strong profit and margin growth.

Management has said they are confident that Brexit, if it happens, will not lead to much disruption for the conglomerate, with contingency plans in place.

The weakness of sterling, sugar price uncertainty and the vicissitudes of the retail sector have led to a rollercoaster couple of years for ABF shares, currently around a quarter off their high of late 2015 but on the front foot in recent weeks.

Many analysts and investors remain fans of the diverse multinational, with Berenberg recently suggesting that the decline in like-for-like sales at Primark, which brings around two-thirds of group profits, might have led investors to believe it was sinking like many other UK peers when actually its international opportunity was “underappreciated” and its sales densities offer “exceptional value”.

Berenberg's analysts noted that the market seems to be valuing Primark at 44% less than high street clothing rival Next PLC (LON:NXT), although it used to be valued at 19% more.

A Primark pick-up could, therefore, see further recovery in AB Foods' shares.

Is US working hard enough?

A concerned gaze will be targeted across the Atlantic in the afternoon on Friday when US non-farm payrolls are due to be released.

Up until Wednesday, the market was forecasting improved employment in the world’s largest economy, to confirm hopes that the recent slowdown is ending.

However, the latest ADP private payroll figures - released mid-week - threw a spanner in the works when the figures came in at under half of the consensus estimate, meaning private companies hired just 67,000 new workers in November.

It’s a bad omen for what’s to come, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics, who said it looked like there would be “no relief over the next couple of months, at least”.

“Labour demand clearly has weakened as the trade war has dampened activity, both directly via the cost of the tariffs and indirectly by creating great uncertainty for businesses,” he added.

Consensus forecasts before Wednesday hoped that US companies would add 190,000 jobs in the period, higher than October’s figure of 128,000, and were expected to be especially strong because strike action by workers at car giant General Motors has now ended.

Significant announcements expected for Friday:

Trading announcements: Associated British Foods PLC (LON:ABF)

Interims: Berkeley Group Holdings PLC (LON:BKG)

Finals: Reneuron Group PLC (LON:RENE)

Economic data: US non-farm payrolls, US Michigan consumer confidence, UK house price index

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