Having endured a tough time following the EU referendum, housebuilder Berkeley (BKG) now says pre-tax profit for the year to 30 April will be at the top end of market forecasts following a stabilisation of its core London and South East markets.
The reassuring news sends shares in the Tony Pidgley-chaired housebuilder, which have lagged the sector of late on concerns over its exposure to a tricky London market, more than 5.5% higher to £31.24.
Click here to view a brief-but-resilient third quarter update from FTSE 250-listed Berkeley, covering the period from 1 November to 28 February 2017.
POSITIVE TREND
While reservations for the seven months from August to February fell 16% year-on-year, this doesn’t come as a shock given changes in stamp duty and the skittishness seen in the market since the EU referendum.
The positive news is reservations in the last two months of the period were ahead year-on-year. ‘Enquiry levels remain robust, cancellation rates are at normal levels and pricing continues to be resilient and above business plan levels,’ reports the £4.05bn cap.
Berkeley’s management also believes headwinds have been partly offset by the continued availability of mortgage finance at low interest rates, favourable currency exchange rates and the quality of its well-presented and well-located homes.
CAPITAL STRENGTH
Drawing confidence from production underway in London and the South East, and expecting to have a forward order book of at least £2.6bn as at 30 April 2017, pre-tax profits are expected to be at the top end of analysts' expectations, ‘with the actual outturn dependent upon completion timing on Berkeley's larger developments’.
The top end of the Bloomberg consensus range for 2017 is currently £789m, 5% ahead of the £750m consensus. Broker Peel Hunt is currently forecasting profits of £757m, yet states it will ‘probably need to increase our 2017 estimates by £30-40m’.
Furthermore, Berkeley has good visibility, now expecting to deliver ‘a similar level of profitability’ for the year ending 30 April 2018, effectively another upgrade given that consensus forecasts are pitched slightly lower. Berkeley also ‘remains on target to meet its ambition to deliver at least £3bn of pre-tax profit over the five years ending 30 April 2021’.
At the interim stage, Berkeley, ungeared with net cash in the coffers, amended its shareholder return plan to include buybacks in order to take advantage of a weak share price.
An 85.24p (£117m dividend) to be paid next week (24 Mar) plus £21.1m of recent buybacks will complete £138.8m of returns by 31 March, while a further £138.8m of shareholder returns are scheduled to be made by 30 September 2017 through a combination of buy-backs and dividends.
ANALYSTS’ TAKE
Peel Hunt remains a keen buyer of Berkeley with a £43.70 price target. ‘We continue to believe the shares offer some of the best upside amongst the housebuilders currently and that the strong forward sales and structural shortage in London/South East housing market will smooth out short term bumps in demand,’ says the brokerage.
‘The fact that management have spent £21m on buying circa 0.75m shares at circa £28.20 also gives us huge confidence that this business is worth comfortably more than the current share price.’
J.P. Morgan Cazenove’s analysts are similarly upbeat, commenting: ‘Berkeley guidance tends to be on the conservative side in our experience, and the further out guidance goes, the more true this tends to be, meaning we are not necessarily expecting consensus to fall for years beyond 2018.'
