Stephen Rawlinson
17 March 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 17th March 2017

Berkeley Group’s trading update this morning emphasises the turbulence it has faced in the last 12 months (since the rises in Stamp Duty). There are three key messages Balfour Beatty was the backmarker yesterday with a 4.3% fall to 271.8p.

Berkeley Group’s trading update this morning emphasises the turbulence it has faced in the last 12 months (since the rises in Stamp Duty). There are three key messages, firstly the business is fully on track in terms of earnings and cash returns; secondly, that some market stability has returned when measured by cancellation rates and pricing resilience;  and, thirdly, (using our words) government measures have aided a 30% reduction in housing starts in London in the last 12 months, at a time of housing shortages. Berkeley has contributed to and been beneficiary of the near 40 year boom that London has enjoyed, which started with the privatisation of BT in 1984 that made getting telecoms capacity in London very easy at a time when trading was becoming computer based and of Big Bang. The third point in its update (as we see it) is that continuation of that growth is threatened by a lack of housing at a time of great economic uncertainty, caused by many factors. Berkeley is not making a political point as such but using it update to emphasise that there is a very delicate balance to continuing London’s growth and, while it will perform well over the next five years, due to its relationships and embedded knowledge about the market, overall there are many more threats to success than there were previously. More below

Balfour Beatty was the backmarker yesterday with a 4.3% fall to 271.8p. CEO Leo Quinn knows how the gig works in these turnarounds, having two notches on his gun already, before joining BBY. It’s about simple messages, get in the cash, make people take responsibility and sort out the information flows so you know what’s happening. And then just hang on tight as the ride might not be 100% smooth! Oh, and remember to have a deal at your sleeve to create a good finish! Of course it never that easy and 2016 might have been a bit less positive than some hoped. The turnaround at BBY will require patience, one of the messages from yesterday. Being patient is made easier in BBY’s case by the existence of the £1.2bn PPP/PFI portfolio and £173m. On a conventional EV calculation therefore the £8bn+ of revenue in the mainstream operation is valued at around £500m (Market Cap of £1.9bn less £1.2bn of PPP/PFI portfolio and less £173m of net cash). Obviously it’s the earnings that matter and the presentation yesterday helped us to recognise that the flight path to better margins is much clearer than it was but there is some turbulence.

One issue not explored yesterday at BBY’s meeting was the rising costs and potentially increasing shortage of building sector labour. BBY is exposed to that in the UK and due to its geographic exposure in the Southern States of the USA (the so called Southern Smile). BBY does a great deal to support skills training and the recruitment of apprentices so its contribution is not in question. But it operates within a broader context of course. The increased use of MMC techniques is expected to make an important contribution. The company is bringing volumetric pods built in China for one development of student housing. The quality of such product is vastly improved in recent years and we know that many UK companies are looking in that direction. The recovery at BBY is not threatened directly by labour and skills shortages but the potential for turbulence arising from such issues is higher now than in the pre Brexit and pre Trump eras.

There were four companies that rose by over 1% yesterday Polypipe (1.8%), Carillion (1.7%), Serco (1.6%) and Berendsen (1.4%). There is little connection between these companies so no real trend emerged. Serco’s gain was probably due to the award of PB status on the Grafton prison project in Australia. Revenue and earnings on that work do not really start to flow until 2020 when the asset build is finished, though there will be project management fees from this year onwards, assuming financial close is achieved. So the “win” was good news for the company but the earnings impact is longer term, hence the muted but positive reaction.

Berkeley’s Tony Pidgely, as most readers will know has read the market very well for many years. Today he is saying that he and Rob Perrins are running the business in increasingly tighter constraints in London. And while Berkeley can cope in the mid term the overall picture for what can be done will be diminished if London living costs remain very high due to housing shortages.

The company is continuing with its plan to return cash to shareholders via buy backs and dividends. The cash return plan was altered six months ago to include buy backs as the BKG was at a level that represented great value, according to management. The company will pay 85.3p per share of special dividend on 24th March which allied with the £21m spent on share buybacks up to 23rd February completes the promised £139m of promised cash returns in that phase. The next £139m is due to be paid by 30th September and teh proportions of that spent on buybacks and dividends will not be known until August, as the rate of share acquisition is not yet known.

Trading data supplied today supports the company’s views about its ability to fund the promised cash returns to 2021. PBT in the current year to end April is likely to be at the top end of the current range of forecasts, we are told. The final outcome depends upon the timing of completions. The consensus is at around £770m PBT and 415p of EPS. The share closed last night at 2963p. On the basis of the current valuation the market is giving a big thumbs down to London’s prospects and not just Berkeley’s. Forward sales at end April at BKG are expected to be over £2.6bn, based on current sales rates. In is working on 58 sites at present and has 22 more nearly ready to commence but held back at the moment due to planning or site infrastructure issues. The macro call on London is unhelpful to the company’s share price. But we know through its JV’s and relationships with landowners and ability to read the market it will adapt to the environment it faces, as it has before. So the balance between in the market of being bearish on London and positive on Berkeley remains. The view this morning does not aid clarity on London’s prospects and arguably could not do so but the message that stability has broken out is useful.

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