The market reacted very differently to updates from high flyers Berkeley Group Holdings (LSE: BKG) and easyJet (LSE: EZJ).
In today’s article I’ll take a look at the news and ask whether the shares remain a buy.
Berkeley Group
Just when Berkeley Group shareholders might have started to think all the good news was on the table, the London-focused housebuilder has delivered a tasty surprise.
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Berkeley said this morning that thanks to £3.1bn of committed cash from forward sales, it would add another £500m to its planned programme of cash returns. The new plan is for shareholders to receive a total of £16.34 per share by 2021, up from £13 per share previously.
Current shareholders have already received £4.34 per share of this bounty. Berkeley is now planning payments of £2 per year from 2016 until 2021. That gives a rolling dividend yield from now on of 5.6% at a share price of £36.
In total, shareholders will receive roughly half of the value of their shares in cash over the next six years.
However, today’s interim results show that while revenue rose by 11% to £1,138.7m over the last six months, Berkeley’s pre-tax profits fell by 3.8% to £293.3m during the same period. The firm’s operating margin was 25.5%, down from 29% during the first half of last year.
The main reason for this fall seems to be a big rise in operating expenses, which rose by 35% from £74.1m to £100.7m during the first half of the year. It’s not clear to me why costs rose so sharply, but one possibility is that Berkeley is having to pay more for the skilled workers it needs. The firm said today that a shortage of skilled tradesmen is constraining its growth.
Berkeley’s margins are likely to fluctuate over six-month periods, but if this trend continues over the full year, it could become a concern.
easyJet
easyJet shares have fallen by 8% since flights between the UK and the Egyptian resort of Sharm el-Sheikh were suspended on 4 November. Investors’ fears following the terrorist bombing were understandable, but today’s passenger statistics from easyJet suggest these concerns were overdone.
easyJet reported a 9.6% increase in passenger numbers for November, compared to the same period last year. The firm isn’t seeing too many empty seats, either, as the airline’s load factor — the percentage of seats occupied — rose from 89.5% in November 2014 to 90.3% last month.
At today’s price of around 1,625p, easyJet shares trade on a 2016 forecast P/E of 11, with an expected dividend yield of 4%. That’s a much more attractive valuation than one month ago, especially as analysts are also expecting a big step up in earnings for the 2016/17 year.
The reason for this is that like most airlines, easyJet buys most of its fuel on forward contracts. easyJet has hedged 83% of its fuel for the current year at $830/tonne, but for 2016/17, the airline has already hedged 60% of its fuel at just $664/tonne.
According to easyJet, every $10 saving in fuel reduces the annual fuel bill by $3.5m. This means easyJet could save as much as $58m on fuel next year, if the airline can secure the rest of its fuel for the year at a similar price.
In my view, both easyJet and Berkeley Group remain an attractive hold.
