Shares in Berkeley Group Holdings (LSE: BKG) fell by 2% this morning, after the group said that pre-tax profit fell by 1.6% to £530.9m last year.
Berkeley has been the biggest faller among the big housebuilders this year, dropping 20%. Investors are concerned about the risk of slowing sales to rich overseas buyers, especially if the UK votes for a Brexit.
Today’s results seem to confirm this risk. Berkeley says reservations during the first five months of 2016 were 20% lower than during the same period last year. Although this is partly due to a reduction in new launches ahead of the EU referendum, these figures suggest to me that Berkeley’s future profits could be at risk if the UK does vote Brexit on 23 June.
In my opinion, buying Berkeley shares today is a bet on a recovery in the London market after the referendum.
Current forecasts suggest Berkeley’s profits will rise sharply during the 2016/17 financial year. The firm’s shares currently trade on just 7.5 times 2016/17 forecast profits. Meanwhile, planned cash returns of £2 per year until 2021 mean that a forecast yield of 6.8% is also on offer.
Is this mid-market firm safer?
Not all housebuilders are equally exposed to the luxury London market, which depends heavily on overseas money to stay afloat.
In contrast to Berkeley’s reservation slump, Taylor Wimpey (LSE: TW) said in April that customer demand was up 14% compared to the same period last year. The firm’s order book contained 8,811 homes, a 7.5% increase from a year ago. In its April update, the group said that the EU referendum hadn’t affected trading during the first four months of the year.
Taylor Wimpey’s customers tend to be regular UK homeowners, many of which have benefitted from the Help to Buy scheme. The company’s current valuation is much less dependent on an uncertain future. Taylor Wimpey shares currently trade on 9.9 times 2016 forecast earnings, with a prospective dividend yield of 6.5%.
If you believe the UK economy will remain stable following the referendum, this could be a decent buying opportunity.
No discernible impact…
Like Taylor Wimpey, Bovis Homes Group (LSE: BVS) boss David Ritchie has made it clear that the referendum hasn’t had any negative effects so far. In an AGM statement in May, Mr Ritchie said that the referendum had had “no discernible impact on our business”.
Shares in Bovis Homes look cheaper than those of many peers. The stock currently trades on a price-to-book value ratio of just 1.3, compared to 2.1 for Taylor Wimpey and 2.4 for Berkeley. One reason for this cheaper valuation is that Bovis’s operating profit of 17.3% is lower than the 20%-plus figures reported by the other two firms.
Lower profit margins mean that the company can’t generate as much profit from its assets. Bovis also offers a lower dividend yield. This year’s forecast payout of 45.3p equates to a 5% yield, versus 6.5%-plus at Taylor Wimpey and Berkeley.
However, Bovis shares have fallen by 11% this year and currently trade on a 2016 forecast P/E of just 8.1. Earnings per share are expected to rise by 16% in 2016 and by 14% in 2017. If the domestic housing market remains healthy, I believe Bovis could still offer value.
