No one was particularly surprised by Berkeley’s 31% fall in profits before tax, which was expected following delivery of a number of Central London developments acquired in the period from 2009 to 2013.
Nonetheless, Berkeley’s shares took a mild dip of around 0.4% this morning, as investors stomached a 28.3% drop in Earnings Per Share coupled with £276.7 million of pre-tax profit, down from £401.2 million in 2018. Revenue was down 43.7% and operating profit took a 36.2% hit.
David O’Brien, equity analyst at Goodbody said: “Berkeley Group has released H119 results to 31 October 2019 with a PBT of £277m, down 31% yoy with volumes retrenching by the same quantum. However, the profit drop does not come as a surprise and we do not envisage any material changes to forecasts.
“Berkeley Group is unique among house builders as it is predominantly London based and takes on technically challenging, longer-term projects. While building in London comes with challenges, their model gives them good visibility of the market. It is positive that the group reports continued stability in underlying markets, particularly London.”
With profits now back to ‘normal’, the group is on target to deliver £3.3 billion of pre-tax profit in the six years to 30 April 2025, with the profit in any one year ranging between £500 million and £700 million, generating pre-tax ROE of at least 15% per annum from long-term regeneration activities.
Chairman Tony Pidgley said: “Today’s results reflect the consistent execution of Berkeley’s uniquely long-term strategy and represent a mix of sales on a number of Central London developments acquired after the financial crisis, which are now reaching completion, and ongoing delivery of our long-standing complex, large-scale brownfield regeneration developments.
“Looking forward in London, Berkeley is now one of very few remaining developers delivering long-term regeneration programmes at scale, due to the complexity of bringing these sites through the development process, their high capital requirements and the uncertain macro conditions that have seen others step back, despite the city’s undersupply of housing.”
To combat a worsening skills crisis, Berkeley will be turning to offsite solutions. The housebuilder’s volumetric modular construction facility in Ebbsfleet is due to be commissioned throughout 2020, when the first modules will be delivered to Berkeley’s sites. We have employed more than 30 staff for the factory operations, with ten apprentices being trained to operate the machinery.
In six years, Berkeley plans to increase its annual housing delivery (including in its joint ventures) by as much as 50%, with the majority of its sales from regeneration sites which are at a lower average selling price than properties taken to sales in recent accounting periods.
The housebuilder has also developed its first zero carbon transition plans for three of its sites. This research has helped establish the design principles, infrastructure choices, energy strategies and technologies that will enable Berkeley, and others, to deliver homes that can operate at net zero carbon by 2030.
Berkeley has a long-term programme in place to return £280 million to shareholders each year, through either share buy-backs or dividends in equal semi-annual instalments. The year for measuring these returns, that now equate to £2.23 per share, runs from October to September. In the first six months of the year, Berkeley paid dividends of £25.2 million and acquired 3.3 million shares for £124.6 million. This completed the return for the year ended 30 September 2019, and also included £15.3 million of the £140.1 million committed to be returned by 31 March 2020.
Rob Perrins, Chief Executive of Berkeley, said: “These results represent a good start to the six year pre-tax profit target of £3.3 billion announced with Berkeley’s September Trading Update, which is underpinned by the visibility provided by the Group’s unrivalled land holdings, strong forward sales position and financial strength.”
Berkeley’s net cash of £1,060.6 million continues to reflect the under-investment of the last three years, commensurate with the uncertain operating environment. Notwithstanding this, and the high level of profit delivery over this period, Berkeley has increased the estimated gross profit in its land holdings to £6.3 billion from £6.2 billion in April 2019.
“Pricing has remained firm and we continue to secure prices above our business plan levels, broadly covering any cost increases,” Perrins said. “This reflects the combined impact of both our increased launch activity in London and continued stability in our underlying sales markets, particularly in London where there is good relative value in a number of locations and supply remains well below the numbers required to meet the Capital’s housing need.
“We remain alert to market risks with a General Election next week and the delay to the UK’s proposed exit from the European Union prolonging the uncertain operating environment of the last three years. This is damaging to our economy and London where fewer developers are prepared or able to accept the high operational risk of bringing forward new homes, with supply falling as a consequence.”
