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Berkeley Group Holdings Interim Update – 17 September 2014

 

Berkeley Shares under Pressure

Following a period of uncertainty for the future of both the UK economy as well as the United Kingdom as a political union, price action in UK house-builder shares has been notably lacking in conviction.

While investors have fretted over both the potential outcome of September’s Scottish referendum and the potential for interest rates in the UK to begin rising sooner than initially expected, each of the house builders has unveiled a solid set of full year, or half year results.

Despite this, price growth in the housing market has cooled over recent months, taking sentiment toward home builder shares downwards with it.

While we remain slightly bearish on the prospects of straightforward house builders at the national level, it is encouraging to see that valuations throughout much of the sector have come back into line with acceptable levels.

This offers scope to limit any further downside across many of the big name brands over the near term, although we still view the risks attached to a large majority of this sector as outweighing the benefits of high allocations to it.

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Berkeley Group Holdings Plc – The Road Ahead

Going forward, we continue to expect out-performance from Berkeley Group relative to its peers, with its dedicated focus upon London likely to be the key driver behind this.

Our rationale is that while BOE action on Loan To Income multiples (LTIs) and higher interest rates will be likely to subdue demand for a period, over time, the effects of this will be disproportionately greater across the rest of the UK.

This allows for a certain margin for error at Berkeley, one which we do not see being disrupted by planned tax changes on foreign ownership of London property.

With the supply and demand disparity in UK property at the most extreme inside of the capital, combined with London’s high earning population relative to other regions, we see scope for a resilient London property market over the medium term.  

So despite the events of recent months, we do not envisage the group finding it difficult to shift London property going forward. However, we caution a lesser number of qualified buyers at current prices could lead sale values to decline, which may cause some level of margin compression in the near term.

As a result, Berkeley Group will probably depend more than ever upon still elevated sales volumes if it is to maintain or grow earnings during the months, quarters and potentially years ahead.

Nevertheless, with a healthy pipeline of development projects at various stages between planning consent and marketable property, we remain confident in the group’s ability to set itself apart from the crowd of other house builders and therefore,  keep investors on side.

Valuation and Summary 

In addition to what is largely a positive trading outlook for the group, Berkeley remains attractive on a valuation basis with a 2014 earnings multiple of 126X, which is in line with that of Barratt Developments and compares favourably with the 14.76X (F) of Bovis Homes.

Further from the valuation and trading outlook, management at Berkeley remain committed to returning an additional 180.00 pence per share to investors by September 2015, through the payment of a special dividend. At current prices, this equates to a yield of 7.5% for the year ahead, with most of this being paid from reserves.

All in all, we continue to believe that Berkeley Group Holdings Plc offers investors good value and as such, we remain attracted to the shares at their current price of 2,370.00. Today we maintain our price target of 2,637.00 pence and reiterate that we view any potential downside as limited to 2,250.00 pence with strong support expected at this level.

Berkeley Group Holdings Plc Hourly Intervals

Berkeley Group

 

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