Berkeley Group (LSE: BKG)reported a better-than-expected rise in full-year profit today, as the company benefited from the shift to higher value homes. The London housebuilder delivered revenues of2,120 million, beating analysts expectation of 1,874 million. Adjusted earnings per share for the year rose 18.8% to263.6 pence, which was also significantly higher than expectations for 181.2 pence.
Higher average selling prices had more than offset the decline in the number of property completions. 3,355 new homes were sold in 2014/5, compared to 3,742 last year; but their average selling price increased from 423,000 to 575,000.
The higher selling prices reflected the completion of higher value projects, including Ebury Square, Fulham Reach and One Tower Bridge, which are all London development projects acquired in the trough of the property market back in 2009/10.
Berkeley had also benefited from the sale of its ground rent portfolio, which raised proceeds of 99.8 million, and generated a profit of 85.1 million.This follows the sale of its rental portfolio of 534 properties to M&G Investments in 2014, and marks the completion of the companys transformation to become asset-light.
Strong operating cash flows and recent disposals have put the company with a sizeable cash pile. Net cash rose to 430.9 million, from 129.2 million last year, leaving Berkeleyin a strong position to increase its dividends.
Berkeleys forward P/E is currently 12.9, and its dividend yield is 5.2%. But with net cash representing almost 10% of its market capitalisation, Berkeley does look less expensive.
A better buy than Taylor Wimpey and Crest Nicholson?
Almost all housebuilders have performed strongly over the past year, but Berkeley Groups stronger focus on London and the South East has meant the company benefited more strongly from higher property prices in the region. The negative side of focusing on London is itsunique structural difficulties in building new homes, caused bytight land supply anda difficultregulatory environment.
Taylor Wimpey (LSE: TW), the UKs biggest housebuilder, is much more geographically diversified, with building activities across the country. Although diversification makes the company less risky, less focus in more expensive regionscould also mean slower earningsgrowth. Taylor Wimpey has a forward P/E of 12.8.
Crest Nicholson(LSE: CRST) also has a focus on London and the South East. However,the companys focus on less expensive homes makes it less attractive, as its operating margin of 19.1% compare less favourably to Berkeleys operating margin of 21.7%.
But, it is Berkeley Groups stronger near-term growth prospects thatsets itapart from its competitors. The timing of expected completions, between now and 2018, for itsLondon development sites will likely lead to stronger earnings growth. These London siteswere opportunisticallyacquiredby the groupbetween 2009 and 2013, when prices were much lower.
The company has an ambitious 2.0 billion pre-tax profit target over the next three years. This equates to an average 3-year forward EPS of around 387 pence per share; which implies that its shares trade at around 8.8 times its expected average earnings over the next three years.
Stronger earnings growth should mean thatBerkeley Group would outperformTaylor Wimpey and Crest Nicholson in the medium term.
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Jack Tang has a position in Taylor Wimpey. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.