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Berkeley aims to capitalise on lack of London housing as profits plunge 31%

Berkeley said profits were down to a “normal level” after an elevated period of profits thanks to a portfolio of London developments acquired in earlier years

Berkeley Group -

Berkeley Group Holdings PLC (LON:BKG) reported first-half profit down by almost a third but launched an increased number of new housing developments in London after seeing a shortage of new housing supply due to recent uncertainty.

In the past six months, the FTSE 100 housebuilder has brought six new developments to the market around the capital and four outside the city.

READ: Berkeley downgraded to ‘sell’ as Liberum fails to see any upside

Amid “market risks” around the election and plans for Brexit, chief executive Rob Perrins said this had created three years of damage to the economy and in the capital city “fewer developers are prepared or able to accept the high operational risk of bringing forward new homes, with supply falling as a consequence”.

He said the group is uniquely well placed to “operate at scale in London” thanks to its choice land holdings and cash backing.

Forward sales “stabilised” at £1.9bn, flat compared to last year, while net cash in the bank stood at £1.06bn at the end of October, up from £975mln at the end of April.

Lower sales and profits the new normal 

Berkeley argued profits were back down to a “normal level” after an elevated period of money-making thanks to a portfolio of London developments acquired for cheap by founder and now chairman Tony Pidgley during the credit crunch.

In the six months to the end of October this year, the group sold 1,389 new houses and flats in London and the South East, down 32% compared to a year ago, with the average selling price down to £644,000 from £748,000 in the first four months of the period and £740,000 this time last year.

This led to revenues of £930.9mln, down 44% on the same period last year, with profit before tax shrinking 31% to £276.7mln as profit margins benefitted from a different mix of properties sold, to offset a 4% rise in build costs. Earnings per share shrank 28.3% to 176.4p after 3.3mln shares were bought back in the period.

Returns in the period included dividends of £25.2mln and £124.6mln of buybacks as part of the plan to transfer £280mln of cash per year from house-buyers to shareholders, saying it was “on track” to continue doing this until 2025.

Caviar, sausages and stamp duty

Shares in Berkeley, having risen by more than a quarter in the past six months, seemed unsure of direction at 4,531p on Friday morning.  

“Former Arsenal football manager Arsene Wenger once observed after a decline in his team’s performance that ‘if you eat caviar every day, it’s difficult to return to sausages’,” said Russ Mould, investment director at AJ Bell and Lewes FC fan.

“This is the situation facing investors in housebuilder Berkeley which, in reporting a big drop in first half profit and revenue, is a victim of its own success.”

Mould said the company describing the latest results as a return to normality is an attempt to "manage expectations towards, at best, maintaining earnings at their current level", with the compensation for shareholders is that the company’s strong cash flow and robust balance sheet means it has plenty of capacity to return cash.

Analysts at Peel Hunt said the sharp fall in profits was "as expected...as the phasing on site timings works through" and that "arguably", the good news is that forward sales have edged back up and cash has risen nearly £100mln.

"The election next week is key for the sector and in particular the likes of Berkeley Group, which has been negatively impacted by high stamp duty rates," Peel Hunt said, adding it felt valuation "does look more stretched" but that a Tory government is likely to cut stamp duty rates "but this may be offset by higher second home and overseas buyer taxes".

Broker Liberum noted that Berkeley’s shares, on which it has a 'sell' rating, “had run hard into these results, on hopes that its markets are stabilising”.

“These hopes have been partly realised with reservations up 10% and pricing firm, but guidance has not been changed. We believe that Berkeley’s share price is now discounting about the most optimistic possible scenario for profit improvement if the election goes right and uncertainty does reduce, but this would offer those buying the shares here very limited upside.”

-- Adds share price and broker comment --

Quick facts: Berkeley Group

Price: 5040 GBX

LSE:BKG
Market: LSE
Market Cap: £6.34 billion
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