The market reaction to the apparent collapse at the top end of the London market, as flagged up by Berkeley Group, tells you all you need to know. The shares ended off only 1.2 per cent. They fell more than 4 per cent on Tuesday, in the general market mayhem that day.
Reservations in the five months to May may well have been down by 20 per cent, but this reflects the entirely sensible decision to market no new projects in London in the run-up to the EU referendum. Berkeley, focused almost entirely in the southeast, says that price inflation is continuing on homes worth up to £1.25 million. Between that figure and £2 million, prices are flat. Above £2 million, there is some deflation, inevitably. This accounts for only 3 per cent of sales, although their high value means they comprise 15 per cent of turnover.
The shares have fallen by a fifth since the start of the year, far more than the housebuilding sector as a whole, and are among the most-shorted on the market. That exposure to the top end of the market worries some, but it seems misplaced.
By any sensible metric Berkeley is doing well. It is shifting downwards in London, which accounts for a fall in the average selling price, but one bugbear in the past, the inflation in housebuilding costs, is coming down and it is experimenting with more high-density terraced homes that are cheaper to build. Brexit is a concern, but one could argue that any subsequent collapse in the pound would make those top-of-the-market flats more affordable to overseas buyers. Whatever happens, the London market will remain chronically undersupplied. The only scenario that could put things into reverse would be a precipitate rise in mortgage rates.
Even if the market does turn sour, Berkeley has a land bank equal to 11 years of sales and can simply stop buying. The next two years of sales are sold forward, in any case. The company has confirmed that it expects to make £2 billion of profits over the three years to April 2018. The proposed dividend plan, increased in December, means that investors are guaranteed a £2-a-year payment until 2021. This means a yield on the shares, off 36p at £29.54, of 6.8 per cent. Hard to see how they can fall further, then.
MY ADVICE Buy
WHY Concerns over Berkeley’s exposure to the top end of the market look overdone, and assured yield is among best available on the market
Aveva
You put your left leg in . . . I am not sure I ever believed that the renewed takeover talks between Schneider Electric, of France, and Aveva were going to come to anything. The two spent much of last year negotiating the merger of Schneider’s engineering software operations with Aveva; the problems were pretty obviously insuperable and it is not clear why those talks reumed at the instigation of the French.
We are where we are. Aveva shares, off 223½p at £16.31, are below where they were on Monday, just before the news broke that talks were back on. The loss of the potential 850p a share that Aveva investors would have got under the original terms discussed is a pain.
The company, though, made clear at the finals in May that there were plenty of options for growth independently and one day we might even look back at a Schneider takeover as yet another example of a UK technology group being taken out by an overseas buyer at a low point in its fortunes.
The shares sell on 25 times’ earnings. That does not look overly cheap, given how long any recovery is likely to take.
MY ADVICE Avoid
WHY Bid talks over for good and the rating looks high
Oxford Instruments
The decline in the fortunes of Oxford Instruments is hard to fathom. The shares have more than halved since the start of 2014, when they were above £18. The company, spun out of academe, naturally, was originally seen as a torch bearer for British high tech, developing and producing nanotechnology, and the share rating reflected that.
Things first went wrong when some orders to Russia were cancelled on political grounds. What the market appears to have missed is that while the nanotechnology side supplies high-value research projects such as CERN, about a third of the group serves industrial customers that are not immune to global macro-economic trends. Specifically, established producers of MRI scanners, which take Oxford’s super-conducting wire, are under pressure from cheaper Asia-derived production and consequently are putting pressure on suppliers. Sales of wire were down 14 per cent in the year to the end of March, in line with a warning given in September, on substantially lower margins.
Prer-tax profits for the year were up by 3.6 per cent to £37 million, but this is largely down to cost savings that brought benefits of £9.4 million. Concerns over banking covenants and dividends turned out to be baseless, but those industrial markets are not going to improve quickly, even if the future for nano is bright enough.
The shares, up 25p at 685p, are on 13 times’ earnings but any immediate outperformance looks unlikely.
MY ADVICE Avoid
WHY No obvious catalyst for an upturn in its fortunes
And finally...
Tyman continues to build itself into a diversified mini-conglomerate based around products for doors and windows. It struck a deal in the spring to buy an Italian hardware maker to lessen its exposure to the US residential market, which the company bought into heavily in the summer of 2013. Tyman has now returned to the United States with the purchase for about £50 million in cash of a maker of hatches and other products aimed at the commercial property market. The shares rose on the back of a placing to fund the deal.
