Finally, investors are demonstrating some positive sentiment towards the housebuilders. London-focused builder Berkeley Group Holdings (LSE: BKG) is up almost 3% today after upgrading its pre-tax profit forecasts for this financial year by more than 5% amid “resilient trading”.
Berkeley squared
Investors also warmed to the £4.4bn FTSE 100 stock as it announced plans to extend its £280m a year shareholder returns programme to 2025.
This caps a positive couple of days for the group, as markets decided that chances of a no-deal Brexit have shrunk this week, which should protect the UK housing market against the shock of crashing out of the EU without a safety net. Berkeley jumped 7.2% yesterday on the news, leading the pack of housebuilders, a dramatic one-day increase that shows how wider political concerns are trumping company news at the moment.
Investors know that Berkeley’s bias to London and the South East means it is more exposed to any Brexit blow-up than its rivals, although all are sitting on nitroglycerin.
House half-full
Today’s half-year results were a mixed bag overall. They showed that Berkeley sold 2,027 homes, down from 2,190 in the same half a year ago, at an average selling price of £740,000, down from £721,000. The bad news came in a sharp drop in pre-tax profits, which fell a massive 25.7% from £539.9m to £401.2m, due to higher overheads and a 24.3% drop in operating margins, although management spun this as a return to more normal levels.
There were positive numbers too, with net cash up from £687m to £859.7m since April and net asset value per share up 7% to £20.74, although cash due on forward sales slipped from £2.2bn to £1.9bn over the same period. Guidance for the next two years was unchanged.
Cheap dividend stock
The first thing that anybody notices about Berkeley these days is that it is cheap, trading at just 5.9 times current earnings, although this rises to 8.5 times forecast earnings. The next thing people spot is the attractive dividend, currently a forecast 5.3% with healthy cover of 2.2. There are now a host of FTSE 100 stocks trading that combine low valuations with high income at the moment, which explains why investors are loving the current slump.
Although I am relatively optimistic on the housebuilders, there is clearly a bumpy road ahead, primarily Brexit, as the uncertainty drags on and on.
Slowing down
Berkeley’s earnings forecasts disappoint. The last five years have seen healthy double-digit growth (hitting 58% in 2017) but City analysts are forecasting a 30% drop in the year to 30 April 2019, and a further 14% the year afterwards. Revenues and profits look set to fall sharply, so the glory days of the post-financial crisis periods are over for now.
This is reflected in the cheap valuation, naturally, although the dividend should reward you while you wait for the recovery. The big question is what happens about, well, the big question. If we get some kind of Brexit resolution, housebuilding stocks are likely to recover faster than most. Then again, they could crash faster in a no-deal scenario. That makes them a tough call right now.
Bloomin’ Brexit, eh?