Berkeley still attractive while housing booms

Tribal Group worth backing; Dyson's worthy of a long-term punt
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Few companies will view the signs of the housing market overheating with as much alarm as does Berkeley, the upmarket housebuilder which specialises in swanky London developments.

Few companies will view the signs of the housing market overheating with as much alarm as does Berkeley, the upmarket housebuilder which specialises in swanky London developments.

House prices are growing nationally at an annual rate of 18 per cent. There is a growing expectation that the Bank of England will raise interest rates in the near future to try to take the heat out of the market. No one has forgotten the property crash a decade ago and policy makers will want to act to head off any danger.

Reporting full-year results, Berkeley yesterday insisted that there was no need to panic. There is no crash coming. The company pointed out that, given the historically low interest rates, the affordability of homes remains good. And it rightly added that there remains a severe shortage of new homes, so demand always outstrips supply. "We might experience an easing or correction in the market which we would welcome, but we do not expect a major downturn," the company said.

That may be so but Berkeley is the developer most exposed to the new build market in London – with about half its earnings coming from the capital. If house prices there do crash, Berkeley's bottom line will not escape unscathed.

On the plus side, property in the capital remains a good bet. It is a sound investment for individuals, especially given how uncertain equities seem right now, and Berkeley homes appeal to overseas buyers and to the rich looking for a safe place to put their money.

Berkeley remains a well-run company with proven skills in urban development – exactly the sort of innovative schemes on brownfield land that excite local councils and fetch a premium price. It said yesterday that reservations for the first five months of 2002 have been at record levels, so current market conditions are solid enough. The group sells its properties as much as 9 months in advance. In the year ended 30 April, profits rose 15.5 per cent to £196.2m.

This column recommended the stock at 660p in December. The shares rose to 837.5p in May but have since come off the boil, closing up 9.5p at 696p last night. That leaves the stock on a forward rating of just 6.5. That's still attractive value. The shares are unlikely to gain while this housing panic is on but, if it passes with a correction rather than crash, there is considerable upside.

Tribal Group worth backing

There is no harm in thinking big, and Henry Pitman, the chief executive of the support services company Tribal Group, is clearly planning to create a monster. With the FTSE 100 outsourcing giant Capita in the same space, Tribal's ambition to "buy and build" a rival in the local government, education and healthcare arena does not seem hubristic.

But after nine acquisitions since its flotation in February 2001, it was pleasing to see some organic growth demonstrated in yesterday's full-year figures, too. Turnover at businesses that were in the group a year ago had risen 42 per cent in the year to March, buoyed by central government's push to get private sector companies involved in the management of public sector facilities and projects.

Tribal now has four main skills – management consultancy, IT services, training, and property services – and is now operating firmly beyond its core education market. It was able to point to several multimillion-pound contracts which pull together skills from more than one of the acquired businesses.

Adding in the acquisition binge, group turnover is up 161 per cent to £45.7m and profit before tax surged 326 per cent to £8.1m.

Mr Pitman's pitfalls are those facing any acquisitive company. The speed with which new businesses are being brought into the group (there were two acquisitions within three days of each other in the spring) increases the risks that something will go wrong with their integration. No signs of that so far, but the shares need to reflect some of the danger. They also need to reflect the possibility that the entrepreneurs who are brought into the group will drift off, leaving an overhang of Tribal shares.

That said, Tribal is in the right space at the right time, and its shares do not look expensive at 283.5p, down 10.5p yesterday. They have fallen by a quarter from their peak last month and now trade on 17 times forecasts of current year earnings. They are worth backing.

Dyson's worthy of a long-term punt

Dyson Group – no, not that Dyson – shows just what can be achieved for shareholders when a controlling family steps aside to allow a dynamic management to shake up a staid old business. In this case, Dyson, an old ceramics business, has pushed its shares up 150 per cent since the non-voting majority of shareholders were enfranchised in 1998.

Thanks to a couple of big acquisitions, Dyson has transformed itself into a growth company, working on solutions to some of manufacturing's big posers: how can we protect the components of catalytic converters in cars, and how can we get computer hard disks to spin faster?

The answer to the first could be Dyson's Ecoflex, which protects the core of the catalyst. The group has won its first order, earlier than expected, from a big catalyst maker, which will be used in a leading carmaker's vehicles.

There is good progress, too, on the second. Hard disks start to wobble after a certain speed, making them harder to read. Dyson says two of the world's biggest hard-disk makers are testing its Carolite alternative to aluminium, while a third is also interested. The first sales could come in 2003.

Dyson's profit before tax, goodwill and one-offs was £4.9m in the year to March, up from £4.1m, in part thanks to a big effort to improve operating profits at the old ceramics business, where a programme of disposals is boosting margins.

Earnings per share will halve this year, putting the stock, at 195.5p, on a multiple of 20, but 50 per cent growth the following year is possible if product launches are not delayed. The shares are worth a punt for investors with an eye on the long-term.

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