Berkeley Group (LSE: BKG) reported a better-than-expected rise in full-year profit today, as the company benefited from the shift to higher value homes. The London housebuilder delivered revenues of £2,120 million, beating analysts’ expectation of £1,874 million. Adjusted earnings per share for the year rose 18.8% to 263.6 pence, which was also significantly higher than expectations for 181.2 pence.
Higher average selling prices had more than offset the decline in the number of property completions. 3,355 new homes were sold in 2014/5, compared to 3,742 last year; but their average selling price increased from £423,000 to £575,000.
The higher selling prices reflected the completion of higher value projects, including Ebury Square, Fulham Reach and One Tower Bridge, which are all London development projects acquired in the trough of the property market back in 2009/10.
Asset sales
Berkeley had also benefited from the sale of its ground rent portfolio, which raised proceeds of £99.8 million, and generated a profit of £85.1 million. This follows the sale of its rental portfolio of 534 properties to M&G Investments in 2014, and marks the completion of the company’s transformation to become asset-light.
Strong operating cash flows and recent disposals have put the company with a sizeable cash pile. Net cash rose to £430.9 million, from £129.2 million last year, leaving Berkeley in a strong position to increase its dividends.
Berkeley’s forward P/E is currently 12.9, and its dividend yield is 5.2%. But with net cash representing almost 10% of its market capitalisation, Berkeley does look less expensive.
A better buy than Taylor Wimpey and Crest Nicholson?
Almost all housebuilders have performed strongly over the past year, but Berkeley Group’s stronger focus on London and the South East has meant the company benefited more strongly from higher property prices in the region. The negative side of focusing on London is its unique structural difficulties in building new homes, caused by tight land supply and a difficult regulatory environment.
Taylor Wimpey (LSE: TW), the UK’s biggest housebuilder, is much more geographically diversified, with building activities across the country. Although diversification makes the company less risky, less focus in more expensive regions could also mean slower earnings growth. Taylor Wimpey has a forward P/E of 12.8.
Crest Nicholson (LSE: CRST) also has a focus on London and the South East. However, the company’s focus on less expensive homes makes it less attractive, as its operating margin of 19.1% compare less favourably to Berkeley’s operating margin of 21.7%.
But, it is Berkeley Group’s stronger near-term growth prospects that sets it apart from its competitors. The timing of expected completions, between now and 2018, for its London development sites will likely lead to stronger earnings growth. These London sites were opportunistically acquired by the group between 2009 and 2013, when prices were much lower.
The company has an ambitious £2.0 billion pre-tax profit target over the next three years. This equates to an average 3-year forward EPS of around 387 pence per share; which implies that its shares trade at around 8.8 times its expected average earnings over the next three years.
Stronger earnings growth should mean that Berkeley Group would outperform Taylor Wimpey and Crest Nicholson in the medium term.
