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When Berkeley chairman Pidgley acts 'markets should listen', analysts warn

By Oliver Haill

Date: Wednesday 20 Jun 2018

When Berkeley chairman Pidgley acts 'markets should listen', analysts warn

(Sharecast News) - When Berkelely's Tony Pidgley acts, history shows that markets should listen, analysts said after the housebuilder's chairman warned again that profits have peaked.
Investors in the FTSE 100 group appeared to be taking Pidgley's profits forecast more seriously on Wednesday than when he first made it back in December, said Russ Mould, investment director at AJ Bell, adding that second-guessing the industry veteran "is usually unwise". Shares in Berkeley were down close to 5% to just under 4,000p.

While Berkely's focus on high-end properties in the South East means it is far from typical within its peer group, which meant investors in the wider sector were not all sent running for the hills quite yet, Pidgley nevertheless expects profits at the company to drop by around a third in the year to April 2019.

Results for the past financial year showed profit before tax of £935m up 15% and ahead of consensus of £910m, with profit guidance for the coming two-year period increased by £75m to £1.575bn, versus consensus of £1.535bn.

The fall in profits may explain why the chairman, as well as managing director Rob Perrins, finance director Richard Stearn and four other executive or non-executive directors were all sellers of stock in the second half of 2017, even as the shares marched higher, Mould said. Caution on the macroeconomic outlook, as well as the impact of higher raw materials costs is reflected in a decision not to expand its land bank to any great degree.

"History shows that when Pidgley acts, markets should listen," Mould 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. Berkeley isn't selling now but it is not seem to be a huge net buyer either."

The company is keeping a £687.3m net cash balance, some £400m above what it views as the normal requirement.

"The fact that this cash will not be returned to shareholders and instead will retained as a back-up adds to the view that Mr Pidgley and colleagues are cautious on the near-term outlook for the housing market - or at least their niche within in - and the wider British economy," said Mould.

Broker Peel Hunt read the Pidley runes differently, saying the results were "typical" of Berkeley with .

"We continue to believe the guidance is conservative," Peel Hunt said, with NAV per share up 26% at £19.59 including that cash-heavy balance sheet.

"Having upped our forecasts last week we see no need to change them further but believe consensus needs to move up by c3-4% for FY19-20. We continue to rate the company highly and still see upside despite the strong (+27%) performance over the last 12 months."

With profits for the past year were higher than expected, analyst George Salmon at Hargreaves Lansdown felt investors principal concern about the stability of the wider London market.

"Punitive stamp duty charges are dampening activity, while the UK's impending exit from the EU brings further uncertainty. Potential buyers are increasingly sitting on the sidelines waiting for more clarity on what the Brexit process will look like, while on the supply side there's questions as to whether there's going to be enough labour to build the homes the country needs. At present over half of London's site labour comes from the EU," he said.

While these challenges were a concern for investors, Salmon said the group's long-term strengths "shouldn't be forgotten" with an "excellent track record of managing the ups and downs of the housing market" and that balance sheet cash able to "help ease near-term worries".


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