Stephen Rawlinson
21 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 21st June 2017

Berkeley’s finals for the year to end April are as candid as usual. The key message is that Berkeley is doing a good job of building new homes and making valuable contributions to society (e.g. apprenticeships, social housing units, taxes paid, charities to which the company has donated) despite the headwinds being created by the politicians (e.g. stamp duty, mortgage relief on BTL loans, Brexit, planning system). The moves yesterday included only small changes.

Berkeley’s finals for the year to end April are as candid as usual. We shall come to the numbers in a moment though as taster we can say they are ahead of expectations. The key message is that Berkeley is doing a good job of building new homes and making valuable contributions to society (e.g. apprenticeships, social housing units, taxes paid, charities to which the company has donated) despite the headwinds being created by the politicians (e.g. stamp duty, mortgage relief on BTL loans, Brexit, planning system). There is no plea as such to politicians to change their behaviour, these are results after all, but the upshot of the ”headwinds”, according to Berkeley, is that fewer dwellings are now being built in London than are needed. The company indicates that it believes the London market has now stabilised and its reservations in the capital are now back at 2015 levels. But, we are faced with a prolonged period of uncertainty. It’s all fair stuff and stops short of entering any political domain. In our view it expresses disappointment rather than frustration; the company is just getting on with conforming to its obligations set by politicians.

Onto the numbers, which are very positive. Revenue in the year rose 33% to £2.7bn and operating profit was up 51% at £756m. The company sold 3,905 new homes at an ASP of £675,000 compared with 3,776 units at an ASP of £515,000 in the prior year. The 3% rise in volumes and 31% rise in ASP were due to changing mix as 15/16 included 638 student apartments. The revenue number includes £27m from the sale of ground rents and £29m from commercial unit sales. The operating margin has risen to 27.8% from 24.5% in the prior year due to reductions in share scheme charges and some cost savings. EPS rose 58% due mainly to the increase in earnings but also due to the share buyback scheme; the market consensus was for 422p, a much lower number due we suspect to a miscalculation of shares in issue. PBT at £812m for 16/17 is £14m ahead of market expectations. The business consequence of the uncertainty is that Berkeley is maintaining a very strong balance sheet despite the costs of special dividends and share buybacks. The group ended the year with net cash of £286m, having made a £255m payment of special dividends and paid £65m to buy back shares. The short term landbank is stable at 33,771 units and there are a further 12,580 plots which are contracted but do not have planning or vacant possession. During 16/17 the company bought sites in the “shire” towns around London that are in high demand such as Tunbridge Wells, Leatherhead, Franham and Cranleigh as well as adding land within the M25 on its own account and through the JVs, St Edward and St William. The JV with Thames water, St James gets less prominence these days.

If the industry’s job is to work within the framework set by politicians than Berkeley is doing as great job, as evidence by these numbers. The progress seems likely to continue as the company adapts, though clearly the highly capital intensive nature of what it does, especially in apartment developments. Means it will be cautious. The returns from what Berkeley does are high and in the emotive world of housing policy, that does not help but it is a consequence of good management. The new build segment seems to have a relatively favourable platform at present and if the Governor of the Bank says there will be no interest rate rises before Brexit then the scene is still favourable, despite the headwinds. There is still much to do in UK Housing and it is significant to us that there is no mention of the Housing White Paper, released in February 2017, which is supposed to fix the broken market but has ended up as being substantially irrelevant, so far.

The moves yesterday included only small changes. Mears up 1.1% and Kier up 1.0% were the largest risers with Morgan Sindall not far behind suggesting some support for companies with relatively stable risk exposure in construction, services and maintenance. The moves were small so there is no real pattern. Kier has CMD next week which should help with understanding the business and getting the valuation back to earlier levels. Travis Perkins fell 2.1% to 1505p as Wolseley’s comments about the UK market were not altogether positive and veered towards the negative. RMI markets are now more competitive than they were and changing methods of construction and e-commerce are affecting supply chains which are disruptive for the mainstream Merchants; in some product areas there is higher added value from helping with specifications and SIG is the main one exposed to that opportunity. With 113p of EPS expected this year and the shares at 1505p Travis Perkins is not expensive compared with historic valuations but there are few compelling reasons to but in scale at present.

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