Second-guessing Tony Pidgeley, veteran chairman of London-focused housebuilder Berkeley Group PLC (LON:BKG) is unwise, says Russ Mould, investment director at AJ Bell, so it is not surprising its shares got a boost today after strong full-year results.
Mould pointed out: “History shows that when Pidgeley starts to sell land everyone should sit up and pay attention.”
READ: Berkeley Group posts strong jump in profits as London housing market stabilises, but cautions on Brexit uncertainties
He said: “Berkeley sold land and houses in the late 1980s in the view that the housing market had overheated and was vindicated by the vicious downturn of 1990-92, when the company began to build up its land bank once more, to the benefit of its balance sheet and shareholders alike.
“Yet Berkeley continues to grow its land bank in the view that demand for houses will continue to outstrip supply, despite the understandable concerns voiced by chief executive Rob Perrins about ‘prevailing macro uncertainty’.”
The AJ Bell investment director noted that Berkeley’s land bank is now 46,351 plots, up from 42,858 a year ago, compared to actual unit completions in the year to April of 3,905.
Lofty returns on sales mean cash flow is good
Mould added: “Helped by strong demand, sales mix and its focus on London and the South East, Berkeley’s average selling price rocketed to £675,000, which in turn took the operating margin to a sector-leading 27.8%, up from 24.5% a year ago.
“Such lofty returns on sales mean cash flow is good and the balance sheet remains net cash, even after dividend payments and share buy backs worth £319mln.”
Berkeley has said it intends to return 800p a share to investors, at the rate of 200p a year over each of the next four years via dividends or buybacks.
That is equivalent to around a 6% return on the FTSE 250-listed firm’s current share price of 3,271p - up 1.4%, or 44p in early afternoon trading today.
More flexibility to its already generous shareholder returns policy
George Salmon, equity analyst at Hargreaves Lansdown noted that last December, Berkeley added more flexibility to its already generous shareholder returns policy.
He said: “Opening up the possibility of engaging in share buybacks allowed it to take advantage of what the group must have seen as a depressed share price.
“Since then, the shares have jumped 30%, so it’ll be interesting to see what course it chooses to take from here on.”
Salmon said: “Engaging in more buybacks would be an indicator of continued bullishness, and should thus be a positive sign for investors.”
He concluded: “Berkeley has plenty of strengths, not least its unique operating model and expertise in developing sites others find too challenging.
“If supply remains constrained, this ability should come to the fore. Demand has stabilised in the capital, and provided London retains its international appeal and interest rates stay low, there should be sufficient demand, both from domestic and overseas buyers.”