Is Berkeley Group about to be rewarded?

Berkeley Group Holdings (The) (LSE:BKG) has made some difficult choices in what has been a tough environment, and with some glimmers of light at the end of the tunnel now appearing those choices are poised to be rewarded.

The group reports that enquiry levels are good, as customers begin to renew their interest in anticipation of falling interest rates later in the year, and with mortgage availability improving given an increasingly competitive range of offers. There will still be vestiges of weakness which will take some time to wash through, such as sales rates, which are down by a third compared to the previous year.

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At the same time, the group is differentiated from a number of its competitors on a couple of fronts. The first is the group’s exposure to London and the South East, where a previously reported average selling price of £624,000 leaving scope for margin improvements and profit. There is also more visibility in future earnings, with an order book of approximately £2 billion, which has enabled the group to predict £1.5 billion of pre-tax profit over the next three years, beginning with an estimated £550 million in this financial year.

Of course, the return to the top of the cycle remains some way off as yet, with the sector having faced a multitude of challenges such as stubborn build cost inflation, higher interest rates and understandably less buying interest. The recently announced Competition and Markets Authority probe into issues including poor build quality and potential price collusion is an unwelcome development which overhangs a number of housebuilders, including Berkeley.

Even so, the group’s previous upgrade to its medium-term outlook gave both extra visibility and comfort to investors. In addition to a net cash position which is expected to exceed £420 million at year end, there is access to an additional £800 million of liquidity, which gives the group significant firepower if required when the market turns.

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In the meantime, the shares have risen by 16% over the last year, as compared to a gain of 5.4% for the wider FTSE100, a performance which is in sharp contrast to many of its peers. While consumer buying interest has yet to turn the corner, however, the market consensus of the shares as a 'hold' demonstrates a degree of caution until any recovery becomes firmly established.

Market snapshot

Investor inflation jitters have not been far from the surface over recent months and the latest release resulted in markets touching on the brakes.

The wholesale producer price index showed a reading at the headline level of 0.6% against an expected 0.3%, while the core figure which excludes food and energy came in at 0.3%, marginally above estimates of 0.2%. The economic picture was further complicated by a rise of 0.6% in retail sales, albeit slightly shy of estimates, implying that consumer strength remains intact.

While the figures were far from startling, investors nonetheless needed to reassess both whether there is any possibility of inflation accelerating once more, and the knock-on impact that would have on the Federal Reserve’s decision to reduce interest rates. As such, the Fed’s policy meeting next week will assume extra significance given this latest data release.

Such uncertainty took some of the recent wind out of investors’ sails, although the drop in each of the main indices was far from enough to spoil the picture in the year to date, where the Dow Jones has risen by 3.2%, the S&P500 by 8% and the Nasdaq by 7.4%.

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The call of uncertainty was echoed in Asian markets overnight and followed through to the UK in early exchanges, where the premier index struggled to make any meaningful progress. Scottish Mortgage Ord (LSE:SMT) was a rare highlight after announcing plans for £1 billion of share buybacks over the next two years, while Smurfit Kappa Group (LSE:SKG) rose following a broker upgrade.

The FTSE100 is desperately clinging on to a positive performance in the year to date having risen by just 0.2%, with the second tier FTSE250 still behind by 0.8% despite a marginally positive open.