Berkeley Group shares dive as investors unconvinced by results

Berkeley Group Holdings (The) (LSE:BKG) has an ambitious strategy and a great deal in its favour, but ultimately it operates in a cyclical sector which is currently constrained by the wider economic environment.

There have been signs of progress, but for potential buyers the level of interest rates and general affordability are under some strain. In the year, Berkeley saw private sale reservations increase by 5%, but levels remain 30% shy of the previous year. 

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While revenue increased marginally by 0.9% in the year ended 30 April to £2.49 billion, pre-tax profit fell by 5.1% to £528.9 million, albeit ahead of the previously guided £525 million, with a lower figure of £450 million still expected in the coming year. This would match the group’s previously stated objective of £1.5 billion over this three-year period, with its focus on the more upmarket end of the housing spectrum proving to be something of a shield against what has been a difficult few years for housebuilders.

Indeed, these issues have been partially offset by the advantages which the group obtains from focusing mainly on London and the South East. Higher house prices follow on from a systemic undersupply of homes, employment levels remain strong and the recent round of wage rises (while inflationary) has helped mitigate some of the problems. The group also welcomed the current government’s more positive ambitions on planning permission and housing delivery.

The group is also differentiated from some of its rivals by being the only large housebuilder to prioritise brownfield land, which inevitably involves some of the UK’s most complex regeneration products. Of the 4,047 homes delivered over this period, which compares to 3,521 the year previous, 92% of the properties were built on brownfield land. This partly explains the group’s high operating margin, which increased to 20.1% from 19.5%, achieved despite a fall in the average selling price across London and the South East to £593,000 from a previous £664,000.

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The “Berkeley 2035” strategy has a number of strands, with the headlines being projected growth in the Return on Capital Employed, further investment in the group’s recently launched “Build to Rent” platform and an ongoing focus on shareholder returns.

Some £7 billion of free cash flow has been identified to underpin the strategy over the next ten years, including £5 billion of new investment, where the group plans to maintain its historic operating margin range of between 17.5% and 19.5%. in addition, the available capital can be allocated between any or all of the three main objectives as the landscape evolves and this flexibility should play to the cash moving to where it is most needed.

Such longer-term ambitions look perfectly feasible. The group currently has 52,714 plots which equates to £6.7 billion of future gross margin. At the current time, the forward order book is already 75% sold for the coming year with a value of £1.4 billion, which gives some visibility of earnings, even though the figure has dropped from £1.7 billion in the corresponding period.

Meanwhile, net cash of £337.3 million has fallen from £532 million as expected, largely due to shareholder returns and land creditor payments. The general combination of share buybacks and dividend growth is on track, with the current yield of 5.8% including specials being a particular attraction of the stock.

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Berkeley continues to pull the levers within its control, and with some success which could easily accelerate given a more benign backdrop. However, guarded consumer confidence remains, with the possibility of higher for longer interest rates keeping some potential new buyers on the sidelines. Even though the revitalised planning system is in train, it will take some time to bed in and the group has also pointed to the overhang of additional building regulations as part of the new industry regulator’s formation.

The share price has also wilted somewhat given the wider pressures, despite Berkeley’s best efforts. The price is currently down by 33% from its most recent February 2020 pre-pandemic peak and has fallen by 15% over the last year, as compared to a gain of 6.3% for the wider FTSE100.

The damaging hit to the share price at the market open on Friday is further evidence that for the moment investors remain unconvinced by the outlook, and that the strategy is still a distant dream. As such, the market consensus of the shares unlikely to break out of its current rating as a hold, albeit a strong one.