Berkeley Group Holdings Plc

Berkeley Group Holdings Plc is a UK-headquartered holding group company engaged in the development of the residential and used property. Its key brands are Berkeley, St. George, St Edward and St Williams. As on December-16-1985, its shares got listed on the main market of the London Stock Exchange for trading. The group is a constituent of FTSE 100 and FTSE 350 indices. First Eagle Investment Management LLC, BlackRock Investment Management (UK) Ltd., Norges Bank Investment Management and The Vanguard Group, Inc. are the major institutional shareholders in the group. (Source: TR)

Financial Results Highlights: (FY19, ended as on April 30, 2019, £m)

Source: Company filing.

Led by growth sales of new homes in London and the South East, the group’s revenue increased by 4.1% to £2,957.4m against the £2,840.9m recorded in the year-ago period. In the year under consideration, the group has sold 3,698 new homes against 3,678 homes were sold in the FY18, at an average price of £748,000 as compared with an average price of £725,000 realised in the year-ago period.

However, the gross margin of the company shrunk to 31.3% in the FY19 against 34.6% recorded in the year-ago period, this reflects a mix of properties sold in the FY19. Pre-tax return on equity plunged considerably to 27.9% against the 41.9% recorded in the year-ago period.

Basic earnings per share reduced substantially to 481.1pence against the 587.4 pence per share recorded in the year-ago period.

Stock Performance

Daily price chart (as on August 01, 2019), before the market close. (Source: Thomson Reuters)

At the time of writing (before the market close, at 02:26 PM GMT), shares of the BKG were quoting at GBX 3,908.0 and added 30 points or 0.81% against the previous closing price. In the year-ago period, shares of BKG have registered a 52w high of GBX 3,993.97 and a 52w low of GBX 3,170.0 respectively. On a YTD basis, the stock was up by 11.47%, and at the current trading level, the dividend yield of the company stood at 1.02% respectively.

Conclusion
As per the latest data revealed by MHCLG (Ministry of Housing, Communities and Local Government), in 2018, homes demand in London was approximately 30% below the 2015 peak and substantially below the London planned target of 66,000 homes per year. Also, the completion of homes slumped substantially by 32% in 2018 against the year-ago period. The operating environment for the industry looks challenging for the coming three years, as the UK's decision to crash out of the EU bloc has brought a lack of visibility in political outlook. Homes demand and supply both are reluctant at present.

Shrinking margins, return on equity and inflating risks for Berkeley Group Holdings Plc
In the above mentioned financial, we saw that the group's gross margins and pre-tax return on equity were shrinking. And this trend might prevail for the company for a mid-term time horizon, mainly because of reluctant demand and supply in its operating segments.

Also, the group is exposed to a variety of risks ranging from weakening consumer confidence, as they are sensitive to changes in the pound rate in their purchasing decisions and their ability to meet obligations under contracts, followed by declining housing demand and Brexit (with or without any deal).

Therefore, considering the industry turmoil and softening the financial position of the group and inflated chances of a no-deal Brexit, we have given an “Avoid" recommendation at the current price of GBX 3,908.0 (as on August 01, 2019).

Howden Joinery Group PLC

Howden Joinery Group PLC (HWDN) is a supplier and manufacturer of joinery, fitted kitchens, and appliances products. The group is involved in the sale of joinery and kitchens products, along with the associated distribution, manufacture, and sourcing of these products. The company’s operations are differentiated into several locations: the United Kingdom, France, and Belgium.

Financial Highlights (H1 FY2019, £ million)

(Source: Interim Reports, Company Website)

In H1 FY19, the company’s reported revenue increased by 5.4 per cent to £652.6 million as compared with the corresponding period of the last year. Howden Joinery UK depots revenue surged by 5.5 per cent to £638.1 million against the £604.7 million in H1 FY18. On a same depot basis, UK revenue rose by 3.4 per cent to £624.9 million in 2019 against the same period in 2018. Gross profit margin increased by 60bp to 61.9 per cent against the 61.3 per cent in H1 FY18, due to a price surge in January and a more disciplined balance between price and volume achieved in depots. Profit before tax climbed by 13.5 per cent to £78.1 million as compared to £68.8 million in H1 FY18, driven by the good sales growth with the improved gross margin. Basic earnings per share stood at 10.3 pence, an increase of 15.7 per cent from the previous year same period data. On 15^th June 2019, net cash was £217.1 million, an increase of 1.8 per cent against the £213.3 million on 16^th June 2018. Through the share buyback programmes, the total amount returned to the shareholders was £46.3 million. The company’s board had approved an interim dividend per share of 3.9 pence, an increase of 5.4 per cent against the 3.7 pence in H1 FY18.

Share Price Performance

Daily Chart as at 1^st August 2019, before the market closed (Source: Thomson Reuters)

On 1st August 2019, at the time of writing (before the market close, GMT 3:55 PM), Howden Joinery Group PLC shares were hovering at GBX 553.80 and decreased by 0.22 per cent as compared with the previous day closing price. Stock's 52 weeks High is GBX 577.40 and 52-weeks Low is GBX 412.40. The group’s stock beta stood at 0.62, reflecting lower volatility from the benchmark index.

Valuation Methodology

Peers: Ashtead Group PLC, Indutrade AB, Diploma PLC, and Macfarlane Group PLC

Conclusion
In the H1 FY19 period, the company’s pre-tax profit increased by 13.5 per cent as it shrugged off the effects of a sluggish housing market and uncertainty over the United Kingdom departure from the European Union. Sales increased by 5.4 per cent to £652.6 million while margins also expanded, reflecting a more disciplined balance between volumes and prices. The company plans to open 40 more depots this year, adding to its existing estate of over 700. Many are located on industrial estates where they pay lower rents and have lower fit-out costs than conventional DIY stores, while depot managers have wide autonomy over pricing and promotions.

However, the group currently faces some of the risks which can impact the business performance like: Failure to maximise the growth potential of the business, Deterioration of business model and culture, Changes in market conditions, Interruption to the continuity of supply, loss of key personnel, Cyber security incident, Product design relevance, and Credit control failure. The company has closed its operations in Germany and the Netherlands, but it believes the France region has great potential. The company is also trading near its 52-week high, indicating limited upside potential.

On the basis of risks as aligned with the business operations, and the valuation done as shown in the table, we recommend investors to keep a “Watch” on the stock at the closing price of GBX 555 (as on 31^st July 2019), while any correction with support from few catalysts needs to be evaluated at a later stage.
 
*All forecasted figures and peers have been taken from Thomson Reuters.

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