Berkeley Group has now released its interim results for the year ending 2017.
Revenues increased by £274.7M and cost of sales grew by £162M to give a gross profit £112.2M above that of last time. There was no profit from the sale of financial assets which brought in £2.8M in the first half of 2016, share based payments increased by £4.1M and other operating expenses were up £4.2M. The share of results from joint ventures grew by £900K, however, and the operating profit increased by £101.6M. Finance income declined by £1.1M and other finance costs were up £1.1M reflecting land purchased on deferred settlement terms, with income tax increasing by £16.8M. All of this meant that the profit for the period was £310.5M, a growth of £82.7M year on year.
When compared to the end point of last year, total assets increased by £144.5M driven by a £100.5M growth in cash and a £90.1M increase in inventories, partially offset by a £32.4M decline in the value invested in joint ventures and a £12M fall in deferred tax assets. Total liabilities declined during the period as a £19.4M decrease in payables due to a reduction in land creditors, was only partially offset by a £6.1M growth in development obligation provisions. The end result was a net tangible asset level of £1.952BN, a growth of £156.3M over the past six months.
Before movements in working capital, cash profits increased by £108.5M to £402.2M. There was a cash outflow from working capital but this was less than last time so after tax payments increased by £12.1M and interest receipts fell by £1.2M the net cash from operations came in at £220.8M, a growth of £219.5M year on year. The group spent just £700K on capex and loaned a further £3.1M to joint ventures but got £40M in dividends from St. Edward to give a free cash flow of £257.5M. They then spent £20.1M buying their owns shares and £137M on dividends to give a cash flow of £100.5M and a cash level at the period-end of £207.9M.
During the period there was £1.373BN of residential revenue, and increase of £306.5M; £13M of commercial revenue, a decline of £4.5M; and £27.2M from the sale of ground rent assets, a decrease of £26.2M. Some 2,076 new homes were sold across the South East at an average selling price of £655K compared to 2,091 at £506K last time with the increase in average selling price as a result of mix with a higher number of schemes in Central London.
Excluding a hiatus around Brexit, reservations for the six month period remain in line with the beginning of the calendar year and are about 20% down on the same period last year as a result of the market adjusting to increased stamp duty and the economic uncertainty arising from Brexit. The underlying market has begun to adjust to these events and the group plans to launch new product in the New Year which will be delivered in the years beyond to 2018.
The two new sites launched in the last six months in Battersea and Kingston both saw sales volumes and prices in line with expectations. The group’s sales continue to be split evenly between owner-occupiers and investors with demand from both domestic and international purchasers robust. Help to Buy reservations accounted for just 75 sales in the period. At higher price points the group have absorbed the impact of the SDLT increases but this have been more than offset by increases elsewhere. Reservation cancellation rates are at normal levels following a temporary increase after the Brexit result. Build cost inflation has continued to ease and is currently running at around 4% per annum.
In the last two years the group completed the disposal of its historic ground rent asset portfolios and they are now being sold predominantly from current sites. The revenue from the commercial activities included the sale of 37,000 sqft of office, retail and leisure space across a number of the developments including Kew Bridge Road, Goodman’s Fields in Aldgate, Royal Wells Park in Kent and Chelsea Creek in Fulham. Last year the revenue came from the sale of 65,000 sqft of office, retail and leisure space.
The share of results from joint ventures increased by £900K to £4.5M. This reflects ongoing completions at Kensington High Street and Stanmore Place as well as the first completions at Green Park in Reading within St. Edward; and pre-development costs within St. William in the early stages of the joint venture.
St. Edward has four schemes currently in development at Stanmore Place, Kensington High Street, the Strand, and Green Park in Reading. 61 homes were sold in the period at an average selling price of £702K. During the period a resolution to grant consent for a development in Wallingford has been obtained which remains subject to a section 106 agreement. The site has come through strategic land holdings and is now included in the land bank. The business also controls a commercial site in Westminster which has a detailed planning consent but will not move into development until the premises are vacated by the current tenant.
Some 3,496 plots in the group’s land holdings relate to St. William schemes, across six developments. The group continues to work closely with National Grid to identify sites from across its portfolio to bring through into the joint venture. In August the business entered into a £150M facility with a number of banks for a term of three years and completed the acquisition of Prince of Wales Drive in Battersea which has now moved into production. Along with the joint venture funding already provided, the business has visibility over its financing arrangements as it continues to grow and develop its land bank.
The group’s land bank comprises 42,125 plots compared to 42,858 at this point of last year. The plots have an estimated future gross margin of £5.896BN compared to £6.146BN (£250M reduction) and includes the margin over their share of the joint ventures. They also hold a strategic pipeline of long term options for more than 5,000 plots.
The group acquired two new sites in the period as well as bringing a further two new sites through the strategic pipeline of long-term options. The four new sites added to the land bank include three sites in the South East – Leatherhead, Cranleigh and Wallingford and in London – Ealing, acquired on deferred terms. They have secured five new planning consents and a number of revised consents in the period. The new ones include St. Edward’s Wallingford site along with St. Williams’s site in Rickmansworth and developments in Blackheath, Woking ham and Kingston. The revised consents have sought to improve the development solution for each scheme to add value or reduce risk.
The group’s land holdings at the period-end are across 79 sties. If these, 56 have implementable planning consent and are in construction, 13 have at least a resolution to grant planning but the consent is not yet implementable and the remaining ten are in the planning process.
The board have reviewed the mechanism for making the remaining £10 per share payments under the shareholder returns programme. The current heightened uncertainty and the reduction in the share price means that they are looking to make the payments through a combination of dividends and share buy-backs as opposed to just dividends.
In 2015 the group dismissed finance director Mr. Simpkin who issued legal proceedings in the Employment Tribunal. In November 2015 he served high court proceedings against the company. There is preliminary hearing in July 2017 to consider the way in which the board exercised their discretion not to permit Mr. Simpkin to retain awards otherwise lost under various remuneration schemes. The reasons for his dismissal are expected to be dealt with at a later hearings. The proceedings are being defended by the company with the assistance of external advisers.
At the current share price the shares are trading on a PE ratio of 11 but this falls to 7.1 on the full year consensus forecast. At the end of the period they had a net cash position of £207.9M compared to £263.1M at the same point of last year.
Overall then this has been a decent period for the group. Profits increased, net assets grew and the operating cash flow was up with plenty of free cash being generated. It is worth noting that sales of ground rents did decline during the period, however. Going forward things seem a little more uncertain, the Brexit vote has certainly added nervousness in the market but the stamp duty increase seems to have had a greater effect with reservations 20% down on the same period last year and the value of the land bank also declined as the group did not replace developed land. With a forward PE of 7.1 the shares seem to be pricing in this uncertainty but having been already invested in two housebuilders I am not looking to increase my exposure at this point.
On the 17th March the group released a trading update covering the period to the end of February. The housing market in London has now stabilised. Overall, underlying reservations in the seven months since Brexit are down 16% with the last two months being ahead of last year. Enquiry levels remain robust, cancellation rates are at normal levels and pricing continues to be resilient and above business plan levels.
The reduction in reservations is across all price points and reflects the ongoing impact of both Brexit uncertainty and the changes in recent years to SDLT and mortgage interest deductibility. This has been partly offset by the continued availability of mortgage finance at low interest rates and favourable currency exchange rates. When couple with the planning environment and increased demands from the combination of affordable housing, CIL, sections 106 obligations and review mechanisms this has resulted in new starts in London falling by around 30%.
The group is onsite in production on 58 sites. There are a further 22 sites that are either in the planning process or they are unable to start onsite due to the number of pre-commencement conditions to be cleared or other enabling issues such as access or utilities. The group are in a strong position and forward sales are expected to be over £2.6BN at the end of April.
Pre-tax profits in 2017 are expected to be at the top end of market expectations with the actual outturn dependent on completion timing on the larger developments. A similar level of profitability is expected in 2018.
On the 4th April the group announced that Chairman Anthony Pidgley sold 1M shares at a value of £31.1M. That is a huge sale and really puts my off wanting to invest in the company at this time.