Berkeley Group Holdings (The) (LSE:BKG) is showing some dogged resilience against an ever-growing list of challenges which are blighting the sector as a whole.
With its exposure to brownfield land development, the apparently slowing planning process is being exacerbated by an increasingly regulatory environment, which is putting pressure on the group’s ability to deliver new homes, especially those in the affordable bracket. It is also crimping general investment into such properties. At the same time, the increase in Corporation Tax is another headwind, as has been an increasing level of build cost inflation.
These issues are quite apart from the other sector-wide challenges. An increasingly toxic combination of persistent inflation, the propensity of consumers to buy given the tightening economic environment and a rising interest rate environment which puts further pressure on affordability (and indeed mortgage availability), have all weighed. In turn, should this filter through to lessening demand, any decline in average selling prices would put further pressure on margins, while supply chain constraints and a generally dour outlook on UK economic prospects complete the mix.
Private sales reservations declined by 15% in the year ended 30 April 2023 as a result, with a further drop of 20% expected in the next financial year. The combined and estimated pre-tax profits for the next two years remain at £1.05 billion and are slightly weighted towards next year. Compared to the current level of profits, this suggests that Berkeley is anticipating a tough couple of years to come. As such, it remains cautious both on new investments as well as sales launches.
Yet despite the multitude of obstacles, the group has shown progress on a number of fronts which is some achievement given the circumstances. Berkeley had previously invested heavily in replenishing its land holdings, in addition to which it has spent some £6 billion on development activity over the last three years alone.
The group is also underpinned by a strong forward sales book of £2.14 billion, which was above expectations despite being slightly lower than the previous £2.17 billion. Berkeley has also further improved its Return on Equity to 18.7% from a previous 17.5% and ahead of its general target of 15%.
Net cash has also grown by more than expected, with the current position of £410 million comparing to an expected level of £375 million and from £269 million in the comparative period. With additional access to borrowings of £1.2 billion if required, the total £1.6 billion of liquidity leaves the group well-placed to withstand the current strains. Indeed, the shareholder return programme is being maintained due to this robust financial position.
It is also worth noting that although the overall implied yield is around 7%, most of this is coming from share buybacks as opposed to a dividend payment, resulting in a yield of 2.3%, which is somewhat pedestrian compared to some of its peers.
The tight management of those factors within its control has resulted in a revenue increase of 8.6% to £2.5 billion and for a pre-tax profit number of £604 million, ahead of both the previous year and consensus numbers of £551.5 million and £597.5 million respectively.
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With its sales pricing firm and build cost inflation beginning to moderate, its exposure to London and the South East in particular could well provide the group with an ongoing edge. Over the last year, the shares have added 5% as compared to a gain of 6% for the wider FTSE100, which is significantly stronger than some of its housebuilding peers whose prices has been under extraordinary pressure.
The latest inflation print from the UK has heaped some more pressure on the housebuilders, given its lack of a movement after previously having been on a downward trajectory. Meanwhile, the market consensus of the shares has recently slipped to a hold, albeit a strong one, although the resilience of this performance could prompt upgrades from some quarters.
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