Berkeley Group Holdings Plc – Final Results

THE BERKELEY GROUP HOLDINGS PLC

 

FINAL RESULTS ANNOUNCEMENT

 

 

The Berkeley Group Holdings plc (“Berkeley”) today announces its audited results for the financial year ended 30 April 2018. 

 

Berkeley is the country's leading place-maker, operating principally in London and the South East, balancing strong operational performance with a desire to produce homes of a high quality, creating fantastic communities for all our customers across all tenures; be they home owners or affordable housing residents. 

 

 

OPERATIONAL HIGHLIGHTS

·      3,536 homes delivered – includes more than 10% of London's new private and affordable homes

·      £0.42 billion of subsidies provided to deliver affordable housing and committed to wider community and infrastructure benefits in the period

·      Over 12,000 people working across our sites in the year and with 850 apprentices over the last two years

·      The Berkeley Foundation won the Better Society Award for Best Partnership with a National Children's Charity for its partnership with The Lord's Taverners and continues its aim to improve the lives of young people and their communities across London and the South of England

 

EARNINGS

·      £934.9 million of pre-tax profit, up 15.1% from £812.4 million

·      Pre-tax profit guidance increased by £75 million to at least £1.575 billion for the two years ending 30 April 2019 and by a similar amount to at least £3.375 billion for the five year period which began on 1 May 2016

 

FINANCIAL POSITION

·      Net cash of £687.3 million (April 2017: £285.5 million)

·      Net asset value per share up 25.9% to £19.59  (April 2017: £15.56)

·      Cash due on forward sales of £2.2 billion (April 2017: £2.7 billion)

·      £6.0 billion of estimated future gross margin in the land bank (April 2017: £6.4 billion)

 

SHAREHOLDER RETURNS

·      £9.34 per share already returned and a further £1.00 per share to be returned by 30 September 2018

·      Remaining £6.00 (£0.84 billion) on target to be delivered evenly over the next 3 years to September 2021

·      4.0 million shares acquired in the year for £140.4 million and dividends paid of £146.7 million

 

 

These results reflect Berkeley's operating model, which places financial strength and sustainability at its heart, and the sites this enabled Berkeley to acquire in the period from 2010 to 2013. They represent a peak for Berkeley with profitability returning to more normal levels from 2018/19, when profits are anticipated to be around 30% lower. Thereafter Berkeley will target a 20% pre-tax return on equity over the cycle, depending upon the level of cash, which currently includes around £400 million excess due to macro uncertainty.

 

 

 

 

CHAIRMAN'S STATEMENT

 

Berkeley's unique operating model is focused on developing complex sites, which others are not willing or able to take on, creating fantastic, sustainable places with homes built to a high quality in which our customers want to live, and enriching the wider community by bringing homes, jobs and amenities for all.

 

There has been a significant increase in housing supply across England over the past year. Completions have grown by 16% and starts by 5% during 2017. This national picture reflects positive decisions and fresh investment by Government and the private sector. However, it masks a complex picture at a local level, with London starts approximately 30% lower than two years ago. It is telling that some funders and builders are choosing to exit the market when faced with the degree of risk and regulation that now confronts development in the capital where macro and political uncertainty, including Brexit, are leading to this caution.  This is a great shame as London is a fantastic world-class city with unique attributes that will last long beyond the current hiatus which is only exacerbating the well documented under-supply.

 

In this environment, Berkeley has itself invested cautiously, focusing as always on the quality of the homes and communities we build. We are growing the business in Birmingham through our newest brand, St Joseph and we have broken ground on our first modular factory in Ebbsfleet, which, once operational, will help us deliver a significant portion of construction value through off-site assembly. The number of apprentices on our sites and in our offices has reached 850 across the business over the last two years, an increase of 30%.

 

Significantly, Berkeley is now a carbon positive company, fulfilling a commitment we made in May 2016. This relates specifically to the operation of our business and we will now match this with a commitment to enable all our homes to operate at net zero carbon by 2030. This will help us cut costs, reduce risk and support the environment.

 

One year ago, we shared the horror everybody felt at the Grenfell Tower fire. Since then, Berkeley has reviewed its high-rise buildings, engaging with local fire authorities, residents, fire safety experts and MHCLG to ensure our buildings are safe while the future regulatory approach is clarified, following the Hackitt review.

 

Berkeley has now returned £9.34 of £16.34 to be returned to shareholders by 30 September 2021 and announced the next £1 per share which will be returned by 30 September 2018; £10.34 paid or committed in total. Total Shareholder Returns in the year were £287.1 million, with £146.7 million returned through dividends and £140.4 million through the purchase of 4.0 million shares. Of the £139.2 million to be returned in the six months to 30 September 2018, £32.2 million has already been returned through share buy-backs. The amount that will be returned as a dividend will be announced on 16 August 2018 and paid on 14 September 2018 to shareholders on the register on 24 August 2018, taking account of any further share buy-backs in the intervening period.

 

In closing, I would like to thank all our people for the quality of their work and their commitment and integrity and I am delighted that their efforts, in conjunction with our partners in the public and private sector, have been recognised through a number of industry awards. In particular, Woodberry Down, which we are developing in partnership with the London Borough of Hackney, has won numerous accolades including WhatHouse? Best Partnership Award, Planning Magazine's Best Community-led Placemaking Award and the RICS Regeneration and Project of the Year Awards. Berkeley itself won the Best Large Housebuilder and Housebuilder of the Year Awards from Building Magazine and WhatHouse? respectively, and Riverlight won RIBA's London Award for 2018. These are all testament to our people and partners working together to deliver fantastic new communities and homes. I am also immensely proud of the Queen's Award for Enterprise (Sustainable Development) that Berkeley has held since 2014. This is the UK's highest business accolade, recognising economic, social and environmental achievements.

 

I am delighted to welcome Rachel Downey and Peter Vernon to the Board as Non-executive Directors and warmly congratulate Justin Tibaldi and Paul Vallone on their appointment as Executive Directors. I would also like to recognise the significant contribution Sir John Armitt has made to Berkeley as he steps down from his roles as Deputy Chairman and Senior Independent Director after six years. I am delighted that Sir John is remaining on the Board and that we have such a capable replacement as Glyn Barker. We have a strong Board and I would like to thank them all as we look to the future for which we are well placed.

 

Tony Pidgley CBE

Chairman

 

CHIEF EXECUTIVE'S STATEMENT

 

Summary of Performance and Strategy

 

Berkeley has delivered pre-tax earnings of £934.9 million for the year, an increase of 15.1% on last year. This is from the sale of 3,536 homes (2017: 3,905) at an average selling price of £715,000 (2017: £675,000), reflecting the mix of properties sold in the year.

 

Year ended 30 April	2018		2017		Change
	£'m		£'m		£'m		%
Revenue	2,703.7		2,723.5		-19.8		-0.7%
Gross profit	946.1		939.8		+6.3		+0.7%
Operating expenses	(166.5)		(183.6)		+17.1		+9.3%
Operating profit	779.6		756.2		+23.4		+3.1%
Net finance costs	(2.7)		(7.6)		+4.9
Share of joint ventures	158.0		63.8		+94.2
Profit before tax	934.9		812.4		+122.5		+15.1%
Pre-Tax Return on Equity	39.3%		41.1%		-1.8%
Earnings Per Share – Basic	562.7p		467.8p		+94.9p		+20.3%
Year-end shares in issue excl. Treasury/EBT shares	133.7m		137.3m		-3.6m		-2.6%
Shareholder Returns
Dividends paid	146.7		254.6		-107.9
Share Buy-backs under Returns Programme	140.4		44.4		+96.0
Shareholder Return in the year	287.1		299.0		-11.9

 

 

These results, taken together with the £812.4 million delivered last year and the visibility provided by robust forward sales of £2.2 billion, means that Berkeley is able to raise its pre-tax profit guidance for the two years ending 30 April 2019 by £75 million to at least £1.575 billion, and the guidance for the five years ending 30 April 2021 by a similar amount to at least £3.375 billion. 

 

As previously identified, these results are a consequence of Berkeley's operating model and the sites it enabled Berkeley to acquire in the period from 2010 to 2013. They represent a peak for Berkeley with profitability returning to more normal levels from 2018/19, when profits are anticipated to be around 30% lower. Thereafter Berkeley will target a 20% pre-tax return on equity over the cycle, depending upon the level of cash, which currently includes around £400 million excess due to macro uncertainty.

 

We have acquired 12 new sites in the year, of which four are on a conditional basis, totalling some 3,600 plots.  We have also secured eight new planning consents and in excess of 50 revised consents. This activity has seen our land holdings rise to 46,867 plots with an estimated future gross margin of £6.0 billion, compared to 46,351 plots and £6.4 billion of future gross margin a year ago.

 

Berkeley's strategy for capital allocation remains unchanged. This is to: first, invest in opportunities for the business where the right risk-adjusted returns are available;  second, to ensure the financial strength reflects the prevailing macro environment; and third, to make returns to shareholders through either dividends or share buy-backs.

Strategic Delivery

 

The current Shareholder Returns Programme was established in 2011 as a framework through which Berkeley would return £13.00 per share to shareholders over a 10 year timeframe. The total returns were increased by £3.34 per share to £16.34 per share in December 2015. Having returned £4.34 at the time, the remaining £12.00 per share was to be paid in equal annual dividends of £2.00 per share over 6 years by September 2021.

 

A year later in December 2016, Berkeley introduced flexibility such that the remaining £10.00 per share, at the time, could be returned through a combination of share buy-backs and dividends, as opposed to solely dividends. Consequently, the shareholder return payments are now categorised as an absolute value per annum which is increased appropriately for any new shares issued, ensuring that the same quantum of cash is returned as previously anticipated. Therefore, on a per share basis, the amount of Shareholder Return increases with share buy-backs, which are undertaken to the extent the Board believes these are in the best interests of all shareholders.

 

Berkeley has now paid or committed £10.34 of the £16.34 Shareholder Returns Programme. During the year, Shareholder returns totalled £287.1 million, with £146.7 million returned through dividends and £140.4 million through share buy-backs. This includes £32.2 million towards the £139.2 million committed to be returned by 30 September 2018. The amount to be paid on 14 September 2018 will be announced on 16 August 2018 and paid to shareholders on the register on 24 August 2018, taking account of any further share buy-backs in the intervening period:

 

As of 19 June 2018		Shareholder Return			Return mechanism
		Per share *	Value		Dividends	Buy-backs
To 30 September 2016		£6.34	£854.9m		£854.9m	–
To 30 September 2017		£2.00	£277.7m		£188.0m	£89.7m
To 31 March 2018		£1.00	£139.2m		£76.3m	£62.9m
By 30 September 2018		£1.00	£139.2m		**	£32.2m **
Returns – announced		£10.34	£1,411.0m		£1,119.2m	£184.8m
By 30 September 2019		£2.00	£278.4m
By 30 September 2020		£2.00	£278.4m
By 30 September 2021		£2.00	£278.4m
Shareholder Returns		£16.34	£2,246.2m

 

*    Shareholder Return expressed on a per share basis, prior to any share buy-backs

 

**   As of 19 June 2018. The amount to be paid as a dividend in September 2018 will depend upon the extent of any share buy-backs (currently £32.2 million) prior to the announcement of the dividend in August 2018.

 

Since the amendment to the Shareholder Returns Programme in December 2016, Berkeley has returned £184.8 million via share buy-backs acquiring 5.5 million shares, at an average cost of £33.67 pence per share (range: £28.08 – £38.45 per share), including 4.0 million shares this year. The annual returns for the years to 30 September 2019 through 2021 of £278.4 million, initially equated to £2.00 per annum, are currently equivalent to £2.08 per share following share buy-backs undertaken. 

 

Housing Market

 

While the underlying demand for new homes remains strong, the housing market in London and the South East has remained subdued over the last year, in spite of the well documented endemic under-supply.  The Government interventions that have helped transactions and starts increase nationally, have little impact in London and the South East where a number of headwinds continue to constrain the market for many. These include property taxation, mortgage regulation and macro uncertainty.  However, for those less affected by these factors, this is a good time to buy with the supply of well-located new-build property built to a high standard of quality, well below the required numbers, at the same time as reduced availability on the second-hand market.

 

For Berkeley, the year has seen new reservations higher than last year by 12% and, in a year of high revenue delivery, this has sustained forward sales at £2.2 billion (April 2017: £2.7 billion).  Reservations in the year include sales from the launch of new developments at White City, Millbank and Ealing (Filmworks) in London, as well as new phases on our regeneration schemes and developments outside the capital in the South East. Prices remain at or above business plan levels.  Sales continue to be split broadly evenly between owner occupiers and investors. The headwinds, which are described in detail below, are most keenly felt by UK customers, while overseas customers continue to see relative value in the London market.  In the year Berkeley sold just 204 homes through the Government's Help to Buy scheme (2017: 157).

 

Looking at London as a whole: overall transaction volumes (including second-hand) are 19% lower than two years ago (Land Registry data); and new starts, the most important measure for assessing the health of the market, are still some 30% lower than in 2015 (according to MHCLG data).

 

The changes to SDLT since 2015 have particularly impacted both home movers and buy-to-let customers. For the former, the SDLT rates mean that the cost of moving is too high and this is harmful for social mobility, with the effect on chains rippling out to all price points, and the efficient occupation of homes. Buy-to-let purchasers are additionally impacted by the 3% surcharge and removal of mortgage interest deductibility. 

 

Buy-to-let has an important role to play in the London market. The early forward sales it provides underpin and de-risk the capital intensive urban regeneration developments that represent the majority of London's remaining development sites, and contribute significantly to the delivery of affordable homes.  Importantly buy-to-let properties are also available for recycling to home owners on a future sale.  This contrasts to build-to-rent which does not support the same level of affordable housing and does not deliver homes that are suitable for, or will ever be available to, home owners.  The market needs both forms of tenure if we are to see the additionality required to meet the target of 65,000 new homes in London each year. New starts are currently around 20,000 per annum.

 

While interest rates remain low, mortgage availability is good, however, regulation restricting income multiples means that many potential home-owners, who are capable of affording today's cost of ownership, are unable to do so. 

 

We support the Mayor of London's latest concordat for homes to be marketed exclusively to Londoners for the first three months.  We also join him in requesting that the lending banks and Bank of England support and bring forward 24 month mortgage offers to enable more home-owners to purchase early in the development cycle, at the same time cash buyers and investors are able to.

 

On the supply side, land remains slow to come forward for development and the combined demands of high levels of affordable housing, CIL and other section 106 requirements are not reflecting the current market conditions.

 

In times of macro uncertainty, it is important that these market dislocations are addressed. If London is to meet its housing targets, we need more builders, but the current operating environment is not one in which small developers can survive as the barriers to entry are so high and we are even seeing a number of large developers either withdraw from, or reduce activity in, London.

 

Build costs have increased between 4% and 5% in the year, with the currency movements noted last year now largely embedded within materials prices. The increase this year was across both labour and materials.

Looking forward, we remain concerned that the impact of recognised skills gap in the UK construction workforce may become more pronounced as the UK exits the European Union. While this is hard to predict, it is a fact that over half of London's site labour comes from the EU. This needs to be addressed by a combination of continued access to EU labour, skills training and innovation in construction if the industry is to achieve its medium term production aspirations.

  

 

Our Vision

 

Berkeley aspires to be a world-class business, defined by the quality of the places we create, generating long term value and having a positive impact on society. Through the framework of 'Our Vision' we articulate our strategy across our five areas of strategic focus: Customers, Homes, Places, Operations and Our People and we are proud to hold a Queen's Award for Enterprise for Sustainable Development, which is recognition of the Group's economic, social and environmental achievements. Berkeley has also been included on the FTSE4Good Index since 2003, reflecting strong social, environmental and governance (ESG) practices.

 

In May we launched a new set of commitments to achieve over the next two years. This follows extensive research to understand the views of our stakeholders as well as key industry issues. We have also aligned our strategy to the UN's Sustainable Development Goals, in recognition of the role business must play in achieving these global aims.

 

Customers

Our customers' experience remains central to our strategy and we use the independently assessed Net Promoter Score (NPS) to drive and measure progress in this area. Our NPS of 73.9 (on a scale of -100 to +100) is sector leading and within the top quartile for retail brands across all sectors. 97% of our customers would recommend us to a friend, surpassing the industry average of 86%.

 

We are delighted that Berkeley achieved the Investor in Customers Gold Award in 2018, following an independent assessment of our customer service.

 

Homes

The quality of the homes we deliver is fundamental to the success of our business, and we believe our core value of excellence through detail is a key differentiator. We are delighted that our homes continue to be recognised externally.  We have taken action over the past year to future-proof our homes in a number of areas, such as incorporating infrastructure to support smart technology and adaptation measures for the effects of climate change. Building on the steps we have taken to become a carbon positive business, over the next two years we will be focussing on the homes we build by setting out plans to ensure they can operate at net zero carbon by 2030.

 

Following the Grenfell Tower tragedy we undertook a thorough review of all of our high-rise buildings, including engaging with the local fire authorities, fire safety experts, residents and the Ministry of Housing, Communities and Local Government (MHCLG). We have ensured all our buildings are safe whilst the future regulatory approach is clarified following the outcomes of the Hackitt Review and subsequent government consultation.

 

Places

Building strong communities can transform people's wellbeing and their quality of life. Sometimes it happens naturally, but it often takes years, if not decades, to evolve. Since 2012 we have been working on a structured approach to investing time, money and care in accelerating the process. On every site with more than 100 homes we undertake an assessment pre-planning to clarify what kind of community we are trying to create. More recently we have trialled the implementation of bespoke Community Plans at 12 occupied developments to drive an events programme and a digital forum and create a system of community governance.

 

We recognise that our impact is wider than just the developments we create. In 2017, 33,000 jobs were supported and £0.42 billion was provided in affordable housing subsidies and community and infrastructure benefits. During 2018/19 we will be investigating how to quantify the wider financial and non-financial impacts generated by our activity – known as social value – on a development scale.

 

We are proud to be the first housebuilder to have an approach for achieving net biodiversity gain on each site; put simply, this means there will be more nature afterwards than before. This year we have introduced a new commitment to sustainable transport, which builds upon our existing requirements for electric car charging points and cycle storage, to understand and respond to future changes in the transport mix and our customers' needs.

  

Operations

We are pleased to have become the first carbon positive housebuilder having met our commitment set two years ago to achieve a 10% reduction in carbon emissions at our sites, offices and sales suites and introduced a programme to offset the remaining emissions. We recognise the risks climate change presents to our business and are responding to the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, whilst continuing to participate in the CDP climate change programme in which Berkeley achieved an 'A-' rating this year.

 

A considerate approach to construction is critical to maintaining good relationships with the communities in which we work as well as with our employees and wider workforce. Around 60% of our sites were recognised at the 2018 Considerate Constructors Scheme National Site Awards in 2018, compared to just 10% nationally. Our average audit score of 43/50 is testament to the efforts of our site teams in maintaining high standards.

 

Making our contribution to tackling the industry's skills crisis continues to be an area of focus; in the two year period there have been over 850 apprentices working on our sites and in our offices, a 30% increase. Overall, people in apprenticeships or training now make up around 10% of the workforce.

 

After successful completion of a number of homes using modular methods of construction, during the year we were delighted to be granted planning permission for our new manufacturing facility. This will enable us to deliver high quality homes alongside other benefits including reduced time on site and reduced environmental impact.

 

Consolidated Income Statement

 

 

For the year ended 30 April		2018	2017
	Notes	£m	£m
Revenue		2,703.7	2,723.5
Cost of sales		(1,757.6)	(1,783.7)
Gross profit		946.1	939.8
Net operating expenses		(166.5)	(183.6)
Operating profit		779.6	756.2
Finance income	3	6.6	2.1
Finance costs	3	(9.3)	(9.7)
Share of results of joint ventures using the equity method		158.0	63.8
Profit before taxation for the year		934.9	812.4
Income tax expense	4	(172.8)	(167.3)
Profit after taxation for the year		762.1	645.1
Earnings per share (pence):
Basic	5	562.7	467.8
Diluted	5	550.2	451.4

 

 

       Consolidated Statement of Comprehensive Income

 

 

	For the year ended 30 April				2018		2017
					£m		£m
	Profit after taxation for the year				762.1		645.1
	Other comprehensive (expense)/income
	Items that will not be reclassified to profit or loss
	Actuarial loss recognised in the pension scheme				(0.6)		(0.6)
Deferred tax on actuarial loss recognised in the pension scheme				0.1		0.1
	Total items that will not be reclassified to profit or loss				(0.5)		(0.5)
	Other comprehensive expense for the year				(0.5)		(0.5)
	Total comprehensive income for the year				761.6		644.6

 

 

 

        

 

 

         Consolidated Statement of Financial Position

 

 

As at 30 April		2018	2017
		£m	£m
Assets
Non-current assets
Intangible assets		17.2	17.2
Property, plant and equipment		25.9	22.8
Investments in joint ventures		315.0	135.0
Deferred tax assets		58.9	59.4
		417.0	234.4
Current assets
Inventories		3,239.9	3,483.4
Trade and other receivables		132.3	229.5
Cash and cash equivalents		987.3	585.5
		4,359.5	4,298.4
Total assets		4,776.5	4,532.8
Liabilities
Non-current liabilities
Borrowings		(300.0)	(300.0)
Trade and other payables		(62.6)	(69.2)
Provisions for other liabilities and charges		(68.0)	(73.0)
		(430.6)	(442.2)
Current liabilities
Trade and other payables		(1,664.8)	(1,809.2)
Current tax liabilities		(47.3)	(117.6)
Provisions for other liabilities and charges		(13.8)	(26.9)
		(1,725.9)	(1,953.7)
Total liabilities		(2,156.5)	(2,395.9)
Total net assets		2,620.0	2,136.9
Equity
Shareholders' equity
Share capital		7.0	7.0
Share premium		49.8	49.8
Capital redemption reserve		24.5	24.5
Other reserve		(961.3)	(961.3)
Retained earnings		3,500.0	3,016.9
Total equity		2,620.0	2,136.9

 

 

 

 Consolidated Statement of Changes in Equity

 

 

			Capital
	Share	Share	redemption	Other	Retained
	capital	premium	reserve	reserve	earnings	Total
	£m	£m	£m	£m	£m	£m
At 1 May 2017	7.0	49.8	24.5	(961.3)	3,016.9	2,136.9
Profit after taxation for the year	–	–	–	–	762.1	762.1
Other comprehensive expense for the year	–	–	–	–	(0.5)	(0.5)
Purchase of own shares	–	–	–	–	(140.4)	(140.4)
Transactions with shareholders:
–  Credit in respect of employee share schemes	–	–	–	–	4.2	4.2
–  Deferred tax in respect of employee share schemes	–	–	–	–	4.4	4.4
–  Dividends to equity holders of the Company	–	–	–	–	(146.7)	(146.7)
At 30 April 2018	7.0	49.8	24.5	(961.3)	3,500.0	2,620.0
At 1 May 2016	6.9	49.8	24.5	(961.3)	2,692.9	1,812.8
Profit after taxation for the year	–	–	–	–	645.1	645.1
Other comprehensive expense for the year	–	–	–	–	(0.5)	(0.5)
Purchase of own shares	–	–	–	–	(64.5)	(64.5)
Issue of ordinary shares	0.1	–	–	–	–	0.1
Transactions with shareholders:
–  Charge in respect of employee share schemes	–	–	–	–	(1.3)	(1.3)
–  Deferred tax in respect of employee share schemes	–	–	–	–	(0.2)	(0.2)
–  Dividends to equity holders of the Company	–	–	–	–	(254.6)	(254.6)
At 30 April 2017	7.0	49.8	24.5	(961.3)	3,016.9	2,136.9

 

Consolidated Cash Flow Statement

 

 

For the year ended 30 April		2018	2017
	Notes	£m	£m
Cash flows from operating activities
Cash generated from operations	6	957.2	537.0
Interest received		4.9	1.9
Interest paid		(7.5)	(2.7)
Income tax paid		(238.0)	(115.6)
Net cash flow from operating activities		716.6	420.6
Cash flows from investing activities
Purchase of property, plant and equipment		(6.1)	(2.8)
Dividends from investments in joint ventures		–	70.0
Proceeds on disposal of property, plant and equipment		0.4	0.5
Movements in loans with joint ventures		(22.0)	8.8
Net cash flow from investing activities		(27.7)	76.5
Cash flows from financing activities
Proceeds from issue of shares		–	0.1
Purchase of own shares		(140.4)	(64.5)
Increase in borrowings		–	300.0
Dividends paid to Company's shareholders		(146.7)	(254.6)
Net cash flow from financing activities		(287.1)	(19.0)
Net increase in cash and cash equivalents		401.8	478.1
Cash and cash equivalents at the start of the financial year		585.5	107.4
Cash and cash equivalents at the end of the financial year		987.3	585.5