Interactive Investor

Berkeley Group maintains profit forecast as global markets struggle

There's little respite for the housing sector and business remains difficult, but management at this FTSE 100 housebuilder remain confident. Our head of markets analyses this update and also studies latest events on global stock exchanges. 

8th September 2023 08:26

by Richard Hunter from interactive investor

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Berkeley Group Holdings (LSE:BKG) continues to fine-tune its operations against a notoriously difficult backdrop for the sector.

In some ways, Berkeley is a different beast to many of its competitors, with a potential edge coming from its mix of an exposure to London and the South East, higher-end properties and the regeneration of brownfield sites in which it is well accomplished. The group has also reined back its land acquisition, making no purchases in this period and with the intention of only investing very selectively in new opportunities.

In this update for the first four months of its financial year, management reaffirmed earnings guidance and said profits for the current year would likely be split broadly evenly between the first and second half.

Meanwhile, the cash position remains strong, which provides a potential buffer against a punishing background and a progressive dividend policy seems likely to be followed, even if the current yield of 3.2% is pedestrian compared to some of its peers. The group has also noted that build cost inflation is at “negligible” levels across the portfolio and that forward sales remain robust.

Berkeley is far from being immune to the wider issues of mortgage availability and affordability, planning bottlenecks, uncertain consumer propensity to buy and a cloudy outlook. Even so, the shares have performed well in relative terms to many of its peers, although the undemanding valuation suggests some concern on the horizon.

Over the last year the shares have added 14% compared to a gain of 2.5% for the wider FTSE100 index, although over the last two years the price remains down by 15%. Investor sentiment has not yet turned the corner, although the market consensus of the shares as a 'strong hold' demonstrates some degree of comfort.

Market snapshot

The spectre of interest rate rises which may have further to run has stalled progress over the last few trading sessions, and the latest economic news from the US in particular has strengthened the possibility.

Lower than expected jobless claims suggest that the labour market remains resilient despite the rate hikes so far. In addition, a further rise in labour costs and a recent spike in energy prices are increasing the difficulties of getting the inflation genie back into the bottle. As such, the Federal Reserve may consider that it has leeway to raise rates once more towards the end of the year. Its insistence that it will remain data dependent, when the data coming through is strong, has left investors who were hoping for imminent rate cuts high and dry.

The current stalemate has taken some shine from market performance, although returns remain high, with the Nasdaq having added 31% this year, the S&P500 16% and the Dow Jones 4%.

Tensions between the US and China have reared their head again, with the reported ban on iPhone use by state employees and wider protectionist fears in both directions weighing on sentiment. Apple Inc (NASDAQ:AAPL) shares have been bruised over recent days as a result, as indeed have some of the local suppliers to the company in the Asia region.

Elsewhere, the Nikkei weakened as reports of a wage slump and a downward revision to growth dampened the domestic demand narrative, while in Hong Kong trading was cancelled today after a “black rainstorm” weather warning.

The FTSE100 displayed a lukewarm response to overnight developments, eking out a small gain at the open. Broker upgrades to both Next (LSE:NXT) and JD Sports Fashion (LSE:JD.) lifted their shares, with a broader read across to the retail sector ensuing.

The general torpor in the market unfortunately lingers on in the UK, as international investors continue to shy away despite the increasingly cheap valuation of the premier index compared to most global peers. As such, the FTSE100 continues to flirt with a level of break even, with today’s lacklustre gain leading to a rise of 0.1% in the year to date.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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