Stock In Focus: Berkeley Group May Yet Surprise Investors

12th Aug '15 by Roland Head

14 comments 15241 reads

With one exception, shares in the UK’s six biggest listed housebuilders have risen by a remarkably uniform 21-26% since the general election.The exception is Berkeley Group, which has risen by 42% in just over three months. That’s not bad for a firm whose share price had already tripled since August 2010.

As I write, Berkeley Group qualifies for 11 Stockopedia Guru screens, at least three more than any other stock. Yet Berkeley is a £4.4bn company that builds houses, not the next Google. After such a sustained bull run, can there really be more upside potential for investors?

Don’t bet against the house

Berkeley founder Tony Pidgley has a deserved reputation as one of the most astute businessmen in the property sector.

His judgement before both of the last two property crashes meant that shareholders were spared the worst of the financial carnage that followed. For example, whereas shares in Taylor Wimpey and Barratt Developments both lost around 95% of their value from their 2007 peak to their 2008 low, Berkeley shares only fell by 50%.

Mr Pidgley’s track record, combined with extensive government support for the housing market over the last five years, strengthens the case for taking a closer look at Berkeley.

The average selling price of a Berkeley-built home has risen by 112% since 2011, from £271,000 to £575,000. Over the same period, the numbers of homes sold annually by the firm has risen by around one-third, to 3,355.

Quality

Berkeley’s homes target quite upmarket customers. A development of new City apartments featured on the firm’s home page as I write are being sold for between £865,000 and £3.6m.

The same upmarket appeal shows through in the firm’s figures. Berkeley’s consistent profitability is impressive.

Very impressive and consistent figures for a cyclical business

The firm reported an operating margin of 17.3% in 2010, according to Stockopedia. This figure has since risen to 24.7%, which is at least 5% more than all of the firm’s major peers.

This consistency shows how skilfully Berkeley’s finances and investments have been managed throughout the housing cycle. Most other housebuilders reported a single-digit operating margin or a loss in 2010.

Mr Pidgley’s leadership appears to give Berkeley an advantage. The firm’s peers seem to…

Unlock with Email

Unlock with Google

Already have an account?
Login here

mortimer

12th Aug '15

he is getting for HOW he does his job

philostat

Commentators curse ? Berkeley fell by 77p per share today. If they go down tomorrow by even less, then my tradeplan gets me out. I 'm certainly not hanging around to see if they "only" drop by 50%.

Roland Head

philostat,

Google Finance shows Berkeley Group (LON:BKG) closing down 64p today. But even 77p is only 2.2%. On a down day for the wider market I'd say that's nothing more than a rounding error.

Fair enough if your trading system says sell, but I don't think today's price action signifies the start of the next housing bust.

Regards, Roland

Hi mortimer,

I suppose my concern is that Mr Pidgley is already a very well-remunerated man, as you'd expect from a founder-chairman.

I agree that he does an outstanding job, but in the 2014/15 financial year alone, Tony Pidgley collected:

£825,000 basic salary
£48,000 benefits
£2,475.000 bonus
£19,808,000 multi-year performance incentive (shares)
£140,000 pension contribution

That's £23m in total. In addition, Mr Pidgley owns 6.4m shares in Berkeley, meaning that by September 2015 he will have received £27.6m cash as his share of the 434p shareholder return. He'll then receive the same amount again by the 2018 and 2021 deadlines.

In my view, you have to question whether an award of a further 5m shares (plus the same for managing director Rob Perrins) is a proportionate award for success. I don't think it is, and I think it's likely to escalate still further the current trend for excessive remuneration in City boardrooms.

Only my view, of course, happy to disagree!

Roland

ExpectingValue

A good analysis.

On the discussion in the comments - I'd rephrase the question slightly: in a commoditised sector like housebuilding, what is it in an organisation that really creates the value?

In Berkeley's case, I guess it comes down to one thing - excellent, genuinely market-beating top level management. They have timed their cycles excellently for over 30 years (selling in '06, halting distributions in '10 to buy as much as land as possible). Pidgley does well out of BKG, but if you assume that he still has an edge, you're almost happy to pay him as much as he wants. A management team who can turn a 5% across-the-cycle return better than the pack is worth £250m a year to a company of BKG's size.

Of course, if you don't think BKG will sustainably earn anything better than the rest of the housebuliding companies - or you think that the advantage they possess isn't contingent on Pidgley and co., but is instead a function of company culture, or pure chance, or anything else... then their package is clearly extremely generous!

I talked about BKG a little here:
http://expectingvalue.com/shares/berkeley-group-a-builder-but-not-as-we-know-it

Sully8786

I think the shares will trade ex dividend tomorrow so I suspect they will fall by at least 90 pence.

Regards,

Sully.

portugull

I sold 7,000 Berkeley Shares last December for a £25k profit at just under £25.00 a share.

Boy am I kicking myself.

Moral dont sell your favourite share, in this case a builder, when the sector is on a roll.

justinian

14th Aug '15

It seems to me that the London market is repeating what happened last time around. If you recall, prior to the financial crisis lots of flats were built in northern cities primarily for investors, many of whom were from the south of the country and who did not understand the areas they were investing in. The value of these flats collapsed by 50% or more and many projects were shelved never to be resurrected.

Wind forward a few years and the builders have been building huge volumes of flats in London to sell to distant investors in the Far East including Hong Kong, Singapore, Malaysia and China. I fear that distance enables a certain amount of 'over selling' to gullible investors. I believe over 40% of all new flats built in London over the last few years have been sold to investors from the Far East.

This may mean that Berkeley is more exposed to whatever goes on in the Far East and China than you may expect. Although nominally counted as 'cash' buyers by the Bank of England, there is some evidence to suggest that an element of borrowing is going on overseas. Secondly, I have read reports in the FT and the like about the sheer number of 'luxury' £1 million pound plus flats in the pipeline versus current actual demand. The figures are astonishing if you care to look them up. I do not know the position for Berkeley re people just not taking up the options on the properties they have paid deposits for in the event of a credit crunch, but I would guess the structure is such that each site is 'limited liability' in its own right so the Group itself may not be brought down by problems.

I am currently invested in Berkeley it has to be said, but with eyes wide open.

DYOR

Hi justinian,

Thanks for raising a good point.

The large number of 'investment' flats being built in London and sold to foreign buyers is definitely a concern, especially as many London residents seem to think that these are not properties that could easily be sold to residential buyers.

In fairness, I don't know how many of these properties Berkeley is building nor how much of the firm's portfolio they account for. Berkeley's management appears to be pretty shrewd and I agree that they are unlikely to allow the firm to become too heavily exposed.

I'm not a Berkeley shareholder, but if I was my approach would be as you describe -- staying invested but waiting for a reason to sell. Given the way the UK property market is manipulated by politicians and vested interests, I think it pays to be fairly cynical where housebuilders are concerned.

Cheers, Roland

Well a very quick google brought this snippet up....

http://www.propertyguru.com.sg/property-management-news/2012/6/33257/uk-developer-to-open-singapore-office

EDIT: This berkeley commissioned lse report makes interesting reading:

http://www.berkeleygroup.co.uk/media/pdf/g/o/Creat...

Interesting links, justinian, thanks for sharing.

Perhaps a focus on international buyers is one of the other secrets of Berkeley's profitability...

Roland

BlueFrew

I sold a while ago at just under £28. In the short term it doesn't look like the best move, but I think in the long term it may prove to be the correct move.

An awful lot of people are now priced out of London, so the only thing that will keep the house price bubble inflated is overseas cash. London once again acting as the world's launderette.

But just where is the cash going to keep coming from? The price of oil will be hurting an awful lot of people. Other commodity prices are on the floor as well. The Chinese Government has had to resort to desperate measures to prevent it's stock market crashing. They are also devaluing the yuan, which will make Britain more expensive to anybody in China.

CMWilliamson

Great analysis, thanks. I was led to BKG through Stockopedia screening and was lucky to buy at the end of Apr for £26. It's been a fantastic ride since and I think more is still to come, but I usually avoid cyclical stocks. The question will be whether I am equally lucky in timing my exit.

underscored

This is Berkleys' patch isn't it? http://www.rightmove.co.uk/house-prices-in-my-area/marketTrendsTotalAvailableListingsAndNew.html?searchLocation=sw8

Stock in Focus: Berkeley Group may yet surprise investors

Don’t bet against the house

Quality

Unlock the rest of this article with a 14 day trial

About the Author

Roland Head

14 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...