Housebuilder Berkeley (BKG) says it is at peak profitability, warning that profit could fall by nearly a third in its current financial year.
Analysts reckon it will only make £640m pre-tax profit which is considerably less than the £934.9m made in the year to April 2018.
The most recent financial year saw pre-tax profit rising by 15.1% and exceed the previous guidance of £900m thanks to better than expected contributions from joint ventures.
You have to remember that the stock market is forward looking and results are historical pieces of information. That’s why the market has voted down the announcement and triggered a 4.2% decline in the shares to £39.63.
Investors are more concerned about what could happen next - and we’re now told it will be lower earnings.
Despite a significant boost in housing supply across England over the past year, new house builds in London were 30% lower compared to two years ago.
Berkeley chairman Tony Pidgley blames higher regulations and political uncertainty, particularly around Brexit, for some housebuilders and funders leaving the market.
The company has also flagged that its spare cash won’t necessarily be handed back to shareholders.
Net cash at the end of its last financial year was £687.3m, well ahead of the previous year’s £285.5m figure. The cash level is seen as being £400m above requirement, yet Berkeley says it will keep this cash due to macro uncertainty.
AJ Bell investment director Russ Mould questions whether the sector has reached its peak earnings strength in the current cycle and how long housebuilders can keep its generous dividends flowing.
Liberum analyst Charlie Campbell says he remains impressed by the resilience of Berkeley’s profits in spite of a slower London market. ‘However, we do take the guidance of fading returns seriously and therefore see the shares close to fair value.
‘Berkeley rightly traded at a significant premium to the peer group as its returns were consistently above average, but that gap is expected to close as returns trend back towards normal levels.
‘Management continues to highlight that supra-normal profits from exceptionally good land buying early in the cycle are becoming closer to being exhausted.’
Berkeley has provided the second warning from the housebuilding sector this week after McCarthy & Stone (MCS) yesterday revealed declining reservations are expected to hit profitability.
