Berkeley benefits from London boom but bubble worries weigh - UPDATE

18th Jun 2014 07:11

- EPS 221p well ahead of consensus- Final dividend of 90p- On track to deliver 243p more by Sept 2015- Fears of housing fizzle hit sharesHousebuilder Berkeley is making the most of the roaring market in London and the South East, building on every inch of land where it has permission and benefitting from soaring average selling prices.However, fears that the housing boom will lose momentum hit the shares on Wednesday morning, exacerbated by hints from the Bank of England's of a shift in policy and looming increase in interest rates. Managing Director Rob Perrins suggested a higher interest rate rise in London and a withdrawal of the Help to Buy scheme to take some wind out of the capital's property market.But the booming market has seen Berkeley build and sell 3,742 new homes in the year to April 30th, less than 1% more than the year before but at an average selling price up almost 20% to £423,000 from £354,000, which has driven an 18% increase in revenues to £1.62bn and a 40.4% increase in pre-tax profits to £380.0m.Basic earnings per share of 221p, 38.6% higher than last year, were a few storeys above consensus of 193.5p. Hitherto in the year 149p of this had been paid as dividends, with another 90p now declared. Management intend to pay another 243p by September 2015 and, with an estimated value of gross margin in current land holdings is now in excess of £3bn and cash due on forward sales now approaching £2.3bn, the group is well on track to achieve this target.Perrins said the aim was to deliver the targeted dividends from earnings "while maintaining the balance sheet at least at its current level and the value in its land holdings above £3bn".Berkeley is currently building on all of its sites that have an implementable planning consent, resulting in it completing some 30% more homes than at the peak of the market in 2007.Looking forward, Perrins said the group continues to see opportunities to acquire suitable land. "The land already in our pipeline comprises a number of sites that match these criteria and the ongoing operational focus is to deliver this over the next five years. If this is achieved, it has the potential to enhance the existing gross margin in the land bank by some £1.5bn and help build a sustainable business." He hailed a strong finish to the year, with a strong cash flow performance, growing its large land estate through further acquisition and optimisation. Even though it invested £353m in new land and paid dividends of £195m, net cash had grown £84m to £129m by the period end, partly supported by the strength of forward order deposits.However, some observers were slightly spooked by Berkeley admitting in its outlook statement that it was "alert to the uncertainty which will arise from changes to the economic and political landscape in the run-up to a 2015 General Election and may impact the business and the market more generally".However, looking at the company's valuation, broker Numis said the shares were "too cheap", although the price may be held back over the next year due to political rhetoric.With cash due on forward sales up 56% to £2.274bn, analysts calculated that was the equivalent to over 100% of 2015 forecast revenues."In our view, the company should be capable of paying at least 180p of dividend per year and therefore we feel that Berkeley is generating a sustainable dividend of 8%. We feel the strength of this yield highlights the low valuation of Berkeley (in keeping with the wider housebuilding sector) and the fact the well invested nature of the business should enable it to throw off significant free cashflow."Analysts at UBS concurred: "The increased visibility on revenues gives comfort that further significant earnings growth is achievable despite another record year and protects the company against potential volatility in the London housing market."But Deutsche Bank noted that cash and dividend per share were lower than its own estimates and said it believed "arguments for a significantly earlier completion of the dividend programme now look more difficult". It "Over the past months, the Berkeley share price has traded back reflecting concerns of the London market overheating. Against this difficult sentiment we continue to see the stock astrading sideways".At 11:32, shares in Berkeley were down 3.85% to 2,173.84p.OH