ii view: Berkeley Group profit falls to 'normal' level

A normal profit level follows a 75% share price rise over the last five years. Where now for investors?

Half-year results to 31 October 2019

• Revenue down 44% to £931 million
• Pre-tax profit down 31% to £276.7 million
• Net cash up 9% to £1.06 billion
• 3.3 million shares acquired under buyback scheme for £124.6 million
• Dividends paid of £25.2 million

Guidance:

• Targeting £3.3 billion of pre-tax profit in the six years to 30 April 2025
• Profit in any one year ranging between £500 and £700 million
• Extended shareholder returns commitment of £280 million per annum to 2025

Chief executive Rob Perrins said:

“These results represent a good start to the six-year pre-tax profit target of £3.3 billion announced with Berkeley's September Trading Update, which is underpinned by the visibility provided by the group's unrivalled land holdings, strong forward sales position and financial strength.

“We remain alert to market risks with a General Election next week and the delay to the UK's proposed exit from the European Union prolonging the uncertain operating environment of the last three years.  This is damaging to our economy and London where fewer developers are prepared or able to accept the high operational risk of bringing forward new homes, with supply falling as a consequence.

“Berkeley's unique operating model equips it with the expertise and capital required to operate at scale in London. With our uniquely well positioned land holdings, forward sales of £1.9 billion and £1.06 billion of net cash, we are well placed to continue making a positive contribution to the economic, social and environmental well-being of London and the South East.”

ii round-up:

Housebuilder Berkeley Group (LSE:BKG) reported a fall in pre-tax profit which it described as a return to a “normal level” in these half-year results. 

Following the delivery of several London developments acquired in the post financial crisis period of 2009 to 2013, and as previously flagged, profit over the first half fell by nearly a third. 

Against a backdrop of Brexit uncertainty, homes delivered to customers fell by nearly a third to just under 1,400, with an adjusted mix of properties sold resulting in the average selling price retreating by 13% to £644,000. 

A 9% rise in the company’s cash held to over £1 billion was the result, according to management, of an under-investment over the last three years, given the uncertain operating environment.

However, looking forward, cash due on forward sales had stabilised at £1.9 billion, down from £2.2 billion in April 2018, but up from £1.8 billion earlier this year. Berkeley, which generates the majority of home sales in London, also reiterated its previous profit guidance for the six financial years to April 2025.

The share price rose marginally in afternoon market trading. 

ii view:

Berkeley’s track record and prudent business model have helped give it something of a revered reputation among investors within the housebuilding sector. A strong presence in London has also left its arguably more subject to international buyer and investor considerations.

For investors, a single-digit historic price/earnings (PE) ratio doesn’t appear overly demanding while the sector’s current focus on shareholder returns and Berkeley’s specific prospective dividend yield of around 4.5% (not guaranteed) provide attraction. However, given the backdrop of Brexit and election uncertainty, and its particular international customer interest, investors may be minded to wait for the election result before taking action. It is a highly cyclical stock, too, and vulnerable in any economic downturn. That said, it is a good company that rides out economic cycles and, historically, is one favoured by long-term investors.

Positives: 

• An industry revered track record
• Six-year profit guidance repeated
• A focus on shareholder returns - 2018 shareholder returns totalled £251.9 million

Negatives:

• First-half profit fell 31%
• Berkeley does not have the national footprint which some of its rivals do
• Industry build costs have been rising

The average rating of stock market analysts:

Weak hold