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Tempus: still room for growth at London builders

Berkeley Group

90p Dividend payable this month

With the benefit of hindsight, the upsurge in the fortunes of the big housebuilders over the past couple of years should have been obvious. There was a unique combination of artificially low interest rates, rising consumer demand and a worsening housing shortage.

The question is how much longer that boom can continue. Last week, Foxton’s caused concern by indicating that, in London at least, prices were slowing down. This year shares in Berkeley, which has the strongest exposure of all to the London market, have underperformed the other housebuilders, such as Persimmon, Bellway and Barratt Developments, as the “London effect” went national and their own operations benefited.

However, as a recent note on the sector from Shore Capital’s Robin Hardy points out, house price surveys have tended to have only a limited impact on the housebuilders. House price forecasting over the past 12 to 18 months has also been notoriously inaccurate.

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Berkeley is an odd case, anyway, because of its decision to return £1.7 billion to its shareholders over the years to 2021, while maintaining its land bank at the present level, worth £3 billion, rather than taking the foot off the gas in response to any slowing of its core market.

The company is seen as a developer of huge trophy projects, such as London Dock, the Wapping site recently vacated by this newspaper. In fact, it operates from 77 sites in all across the south. For example, a 900acre development in Southall, west London, can hardly be regarded as trophy.

The next dividend, of 90p and worth £121.7 million, is payable later this month, but, after the £100 million disposal of some assets, Berkeley expects to remain ungeared even after that.

This means that the shares, up 2p at £24, have the support of a yield well in excess of 6 per cent out to 2021. This is a remarkable assured income and again puts the company in a class of its own.

If you take the view, as I do, that the London market is in no danger of collapse, and if Berkeley continues to find the sort of sites it needs, which seems a fair enough assumption, the shares are still attractive. Buy.

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My advice Buy

Why There seems little prospect of the London housing market slowing, w hile the shares offer a dividend yield of above 6 per cent

Hargreaves Services

£26.9m Proceeds of Imperial sale

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One senses that the restructuring of Hargreaves Services may be a protracted business, with no clear end in sight.

The market has always had a problem valuing Hargreaves, which has surface coalmining operations as well as a more profitable coal and coke importation and distribution business. One effect of the process, then, may make the attractions of the last more obvious.

The problem is the low cost of coal, £55 a tonne when the company raised cash to buy some mines in April 2013 but now down to £46 a tonne. Hargreaves plans to make itself a more efficient business and, if the price remains at the present level, probably this will involve a considerable reduction in

production from the existing 2.5 million tonnes a year. This will allow it to focus on those more lucrative operations.

Yesterday it announced the sale for £27 million, or a respectable seven times’ earnings, of its non-core Imperial Tankers business, which ships speciality chemicals. This will virtually halve debt. The money may be invested elsewhere, or, if nothing is found, some may be returned to shareholders. There are any number of other issues still unresolved. Jefferies, the company’s broker, took an axe to its forecasts for the current year, reducing these by 31 per cent.

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The shares fell 76p to 715½p. Therefore, they sell on about seven times earnings, which looks cheap enough. At this level, they might be worth a punt, but, given the enormous uncertainties, only with funds that one is prepared to risk losing.

My advice Use caution

Why Results of restructuring are far from clear

Vertu Motors

111 Number of dealerships bought

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A sector, like housebuilding, that has benefited from factors outside its control is the motor trade. Consumer demand is rising and an over-supply of cars made by continental producers has allowed dealers to sell these on favourable financing terms, helped still further by the strength of sterling.

For companies such as Vertu, Britain’s sixth largest dealer, the trick is to ensure that sales are growing at a faster rate than the market as a whole. This is happening, as business moves towards the larger groups with the benefit of a strong online presence.

Vertu was founded from scratch in 2006 by refugees from the old Reg Vardy business

and was floated as a cash shell the next year. It has

since bought 111 dealerships. This brings with it a steadily rising profits stream as these are improved, a process that typically takes four or five years.

Peter Jones, an industry veteran, arrived recently as chairman and has invested almost £300,000 in the shares. The market is still fragmented, so there should be enough small dealers available to maintain that growth. The shares, up ¼p at 57½p, are on 11 times earnings and look worth a buy long term.

My Advice Buy long term

Why Vertu has a constantly improiving profits stream

And finally . . .

The purchase by Crown, of the United States, of Empaque, a Mexican packaging business owned by Heineken, provides a snapshot on what a large drinks can business is worth, according to a note from Jefferies on Rexam. This is purely a producer of cans, having sold its last non-core operations this year. The effect on Rexam’s business is immaterial, as the business should have little excess capacity after continuing to supply Heineken, but the deal does indicate that such companies are scarce and valuable, the note says.

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