ii view: Berkeley stays committed to shareholder returns

Covid has impacted, but the housebuilder's strategy is designed for a high-risk cyclical housing market. 

Full-year results to 30 April 2020

• Revenue down 35% to £1.92 billion
• Pre-tax profit down 35% to £504 million
• Net cash up 17% to £1.14 billion
• 3.5 million shares acquired under buyback scheme for £130.5 million
• Dividends paid of £149.8 million

Guidance:

• Targeting £3 billion of pre-tax profit in the six years to 30 April 2025 – down from £3.3 billion
• Reiterating shareholder returns commitment of £280 million per annum to 2025
• Profit delivery to be weighted towards the second half of the year in an approximate one third to two thirds ratio

Chairman Tony Pidgley said:

"The onset of the Covid-19 lock-down in the last five weeks of the period had a significant impact on our operating environment, but Berkeley ended the year in a strong financial and operational position as our resilient business model and agile working culture defined our response. Berkeley's strategy is designed for a high risk cyclical housing market, so when conditions shift for any reason we have high liquidity, long-term cash flow visibility and highly skilled teams with the grip to effect decisive operational change.  This means we are well placed to manage the current period of uncertainty without call on the Government's furlough scheme or its Covid Corporate Financing Facility."

ii round-up:

London, Birmingham and the South East-focused housebuilder Berkeley Group (LSE:BKG) today reported a full-year profit of £504 million, ahead of its own Covid-19 impacted late March estimate of £475 million.

Group cash held reached a record high of £1.14 billion, while management reiterated its commitment to return £280 million per annum to shareholders up until 2025 despite pandemic uncertainty. 

Berkeley Group shares rose by nearly 5% in early afternoon UK trading having fallen by just over 15% year-to-date. Shares for rivals Taylor Wimpey (LSE:TW.) and Barratt Developments (LSE:BDEV) are down by 20% and 30% respectively during 2020. 

After an initial fall to around 40% of normal production capacity in the wake of Covid-19 shutdowns, activities have now been largely restored. Sales in April and May were around half of the normal levels given the pandemic lockdown. 

A prior commitment to return £455 million of surplus capital to shareholder has now been deferred for up to two years given Covid-19 uncertainty. The cash also offers Berkeley the ability to invest in new land should opportunities occur given the crisis. 

The group’s next scheduled return of £140 million to shareholders remains on track for payment in late September. 

As previously flagged, profit compared to last year fell by 35% and is considered by Berkeley to be a more normal level. This followed the delivery of several London developments acquired in the post financial crisis period at value land prices. 

It sold 2,723 homes in the year, down from 3,698 the year before and at an average selling price of £677,000, a drop from £748,000 achieved the year prior.  

Sales continue to be split roughly 50:50 between owner-occupiers and investors, including many overseas customers. Both Brexit and Covid-19 played their part in hindering performance. 

ii view:

Berkeley’s track record and prudent business model have helped give it something of a revered reputation among investors within the housebuilding sector. A strong presence in London has also left its arguably more subject to international buyer and investor considerations.

Both Brexit and Covid-19 have raised challenges over the last financial year, but difficulties can bring opportunity, as Berkeley demonstrated with its land buying after the financial crisis. Now, a deferred £455 million return to shareholders could see it seeking further opportunities. 

For investors, the group’s successful track record and focus on shareholder returns continue to shine. But Covid uncertainty cannot be overlooked, while Brexit challenges could return later in 2020 as the UK looks to conclude an exit deal with the EU. A forecast price/earnings (PE) ratio above both the three-and 10-year averages also doesn't scream value. For now, a wait and see approach may be most appropriate. 

Positives: 

• An industry revered track record
• 2019 shareholder returns rose by 28% to £280 million

Negatives:

• Profit fell 35% year-over-year
• Both Covid-19 and Brexit offer ongoing uncertainty

The average rating of stock market analysts:

Strong hold