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Berkeley Group Holdings Plc Interim Update – 18 February 2015

Company Overview

(Taken from Berkeley Group website)

The Berkeley Group builds homes and neighbourhoods. We focus on creating beautiful, successful places in London and the South East. We work together with other people to tackle the shortage of good quality homes, and make a lasting contribution to the landscape and to the communities we help create.

The Berkeley Group is made up of four autonomous companies: St George, St James, Berkeley and St Edward. We are publicly owned and listed on the London Stock Exchange as an FTSE 250 company.

Berkeley’s business strategy is called Our Vision. This focuses on five key areas: our customers, homes, places, operations and people. Through this framework, we are striving to become a world-class business.

Index FTSE 250 Ticker BDEV.L Latest Close 2,552.00
52 Week High 2,808.00 52 Week Low 2,033.00 P/E (H) 11.5
Dividend Yield %  (E) 12 Dividend Cover (E) N/A CEO: Rob Perrins
CFO: Richard Stearn Previous Price Target 2,637.00 Current Price target 2,005.00

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A strong earnings performance and attractive capital return program drives Berkeley higher; hits price target

After a tough first half of the year which saw the shares fall as low as 2,050.00 pence, as concerns over mortgage lending and tax rules surrounding London property began to bite, Berkeley Group shares rebounded with the wider sector reaching peaks of 2,660.00 pence before the close of the year.

Key to the rebound for Berkeley was a general brightening of sentiment toward the sector, as expectations for when interest rates would begin to rise were revised backwards, in addition to a highly positive interim update released by the board in October.

This saw management at Berkeley unveil a substantial increase in earnings per share for the period, as average selling prices continued to rise, while the group also generated an additional £85 million in post tax profits from the sale of a portfolio of rental assets.

EPS for the period came in at 178.00 pence, up from a little over 100.00 pence, which supported the decision by management to announce another 90.00 pence return of capital to shareholders (dividend). This leaves an additional 90.00 pence to be paid by the group during the first 9 months of 2015 in order for it to meet the first milestone in a program which will see it return just over £12.00 per share to investors by the year 2021.

The completion of the first leg of this capital return program (433.00 pence) will place the yield for existing investors in the current year close to 12%, which remains an attractive proposition given the current environment for interest rates.

Berkeley Group Holdings Plc Share Price / Daily Intervals

Berkeley Group Holdings Plc Daily Annotated

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Balance sheet, dividend and valuation

In relation to the balance sheet, Berkeley Group holdings remains attractive relative to the wider sector with gearing of just 13%, which compares favourably with an industry where present gearing is as high as 50% in some cases. Although, we add that gearing of 50% is not necessarily a cause for concern in itself.

In terms of the dividend, Berkeley remains on track to provide a yield of 12% to investors for the calendar year running between September 2014 and September 2015, which is predominantly comprised of individual payments of 90.00 pence each. This is of course contingent upon the group making good on its pledge to pay an additional 90.00 pence ahead of September 2015.

On the subject of future dividends, the group has pledged to return an additional 433.00 pence to shareholders ahead of September 2018, followed by additional payments totalling another 433.00 pence ahead of September 2021.

While these plans are subject to change during the years ahead, they offer the potential for shareholders to receive close to £13.00 in dividend returns, or just under 50% of the current share price, over a seven year period.

This could help to support the shares over the longer term by providing a cushion against losses for investors and in our view, increases the attractiveness of the shares relative to others in the sector.

From a valuation perspective, Berkeley Group Holdings Plc currently trades at just over 2.2 X NAV, with forward and historical earnings multiples of 10.8X & 11.5X respectively. This places the shares close to being fully valued in our view, given the downside risks to both London property as well as the house-building sector in general during the months ahead.  

In addition to this, much of the group’s earnings growth during H1 was due to one off income which arose as a result of disposals of assets, which indicates to us that the London market may be cooling more quickly than many investors have anticipated. It also adds to our conviction that the shares, which are yet to flinch, are fully valued at present.  

This appears a particularly pertinent point when considering the organic earnings growth experienced by the likes of Barratt Developments (300+%) and Bovis Homes Plc (70+%) during 2014.

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The takeaway

On balance we believe that Berkeley is fully valued at current levels given the lag in organic earnings growth seen in H1 relative to the sector, as well as ongoing uncertainties it faces in its core market,

These uncertainties are personified by a general election in 2015, as well as a mayoral election in 2016, which are both likely to raise further questions over property taxes, the future of the Help to Buy program in addition to concerns over access to the market for overseas investors.

Given that such factors are yet to be reflected in the BKGH.L share price we believe that the downside currently attached to the stock is slightly greater than that of its peer group. However, we value the shares using the same methodology of others.

As a result, we assign a 1.7X NAV target to the shares for the near term (3 months), with a negative outlook for the following quarter from there.

This means that while we expect a reduction in the shares to 1.7X NAV, which would be in line with our expectations for much of the remaining sector, we caution that dependent upon the outcome of the general election; it is possible that the shares could fall further than this for a short period of time at least.

As a result, we lower our price target today from 2,637.00 pence to 2,005.00 pence per share, which implies downside of 21.4% from the current level. This corresponds to forward and historical earnings multiples of 8.5X & 9X respectively, in addition to 1.7X Price/TNAV and the 38.2% retracement of the July 2008 low – February 2014 trend for group.

The next scheduled event of note for the group will be the release of the interim management statement in March 2015.  As always we shall endeavour to update all of our members in greater detail at this time.

For further information relating to changes to our outlook for the UK housing market. please see the report available via the link titled:  Updating our outlook for the UK housing market and for UK house-builders



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