BKG – Berkley Group Holdings – my thoughts on the finals

In this blog I argue that housebuilder BKG is very likely to be overvalued at its current price of 2237p based on usual valuation metric, and holders should sell.

Housebuilder BKG published its finals today, sending the share price down 1.02% against a rise of the All-Share of 0.19%.

ShareSoc did an excellent write-up on their results
(http://bit.ly/1pILrQ1), which I acknowledge is more insightful and perceptive than anything I could write. They note that Investors Chronicle reported on Bellway in last week’s edition, and concluded that the shares are “too cheap” after noting its high return on capital.

I thought I’d weigh in with a few of my observations.

BKG has a ROE of 15.1%, putting smack in the mid-range of its decade returns. So the ROE might indicate that it is fairly valued. Its operating margins are near the top end of historic averages, which is worrying for valuation levels. BKG has a PE of 11.3, which is low relative to the market. But we must remember that housebuilding is an inherently cyclical business, and for cyclicals, low PEs are a sign of danger. The market is signalling that it doesn’t think there is much in the way for margin expansion of growth. I think that this is a very reasonable worry.

On a PBV basis, BKG is at 2.18, around about the 90th percentile. Worryingly expensive, in my view.

The dividend yield is also unusually high: 7.87%. Yields like that often suggest that the market thinks that the dividends are
unsustainable. In my limited experience, the market is right more times than not on this matter.

Analysts are projecting 14.2% EPS growth for 2015. It’s a popular pastime to scoff at analysts, but seeings as many of them are more knowledgeable than I am, I wont be one of them. Notwithstanding that, I find it very difficult to see how they could know what future profits will be given the highly uncertain nature of cyclical companies. Things can change, and my suspicion is that they are extrapolating
recent results; a potentially dangerous activity.

The Motley Fool gives the following points (http://is.gd/rBmr6r) in favour of buying shares in BKG, in light of the results: “interest rates are unlikely to move upwards … the sun could yet shine for a good while longer and allow the company to continue making hay at a quite astonishing rate”

As regards the latter point, they could well be right, but the argument is a little too hand-wavey for my liking.

I am aware that there is/are well-seasoned and sophisticated investors who consider the yield, forward PE and general market dislike of builders make BKG a “buy”. So, don’t take my word for it, you’ll have to make up your own mind. Cavaet emptor, DYOR, and so on.

We shall see.

Happy and prosperous investing to you all.

Update 19-Jun-2014: Peel Hunt upgrades BKG from hold to buy with a price target of 2680p. claiming that the opportunity was too good to miss. “Full-year results confirmed the strength of the market and the quality of the underlying business”.


About mcturra2000

Computer programmer living in Scotland.
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