The FTSE 100 housebuilder had a September to forget, but our head of markets believes this report may signal something of a change in fortunes.
Berkeley Group Holdings (LSE:BKG) endured a difficult pandemic when its heavy exposure to London was both a blessing and a curse, but the indications are that sentiment is improving once more in the capital.
The group’s sales are broadly split between owner occupier and investors, especially overseas, and the pandemic threw this mix into some difficulty. Owners began to consider a life outside of the capital as the pandemic progresses, whereas overseas investors were understandably unsure of the immediate outlook. With the further implications arising from Brexit and its aftermath, the group subsequently suffered.
However, the group remains committed to the long-term fundamentals of not only the London market, but the South East in general where housing undersupply is still in strong evidence. Indeed, Berkeley maintains that it is still in an investment phase, and anticipates a net spend of some £700 million over the next two and a half years as it continues to capitalise on a recovering market.
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The early signs are certainly promising in these results for the six months ended 31 October 2021. Sales reservations are now ahead of those being seen pre-pandemic and forward sales of £1.7 billion provide earnings visibility for the immediate future. The pre-tax return on equity has risen by 4.2% to stand currently at 19.1%, and a 36.3% increase in revenues has driven an improvement of 26% to the pre-tax profit figure. Indeed, the current strength of trading has enabled Berkeley to raise its earnings guidance for the full-year number by 5%.
Meanwhile, the cash generation has also contributed to a robust financial position. The group has ample access to liquidity if required and has net cash of £846 million at the end of this period. It has committed to a shareholder returns plan which has temporarily turbocharged the yield following a special dividend, and returns over the next three years imply a yield of anything up to 5% depending on the mix of dividend payments and share buybacks.
Of course, the company is not immune from the wider economic challenges, and the supply chain disruptions seen elsewhere are having an impact. Berkeley has noted an increase of around 5% in building costs, although this is being offset by sales pricing, and for the moment the company is adequately staffed and not therefore suffering from the general labour shortage.
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The reliance on London was brought into sharp focus during the pandemic and the shares have not been able to enjoy the rally seen by most of its peers within a booming housebuilding sector. Indeed, the shares are largely flat over the last year, as compared to a rise of 12% for the wider FTSE100 and over the last two years have stuttered to a gain of just 2%.
However, the upbeat outlook and accompanying earnings upgrade in this report may signal something of a change in fortunes. It could also mean that the market consensus of the shares, which currently stands at a "strong hold", may also be subject to some positive uplift.
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