ii view: Profits slide at housebuilder Berkeley Group

Covid and Brexit uncertainty weigh against shareholder returns and investment at this UK housebuilder. 

First-half results to 31 October

• Revenue down 4% to £896 million
• Pre-tax profit down 16.6% to £231 million
• Net cash down 16% to £954 million
• Total shareholder returns (dividends & buybacks) up 14.4% to £171.4 million

ii round-up:

London, Birmingham and the South East focused housebuilder Berkeley Group (LSE:BKG) reported lower first-half profit as disruption to the housing market under the pandemic impeded the number of homes sold. 

Pre-tax profit for the period fell by 16% to £231 million as the number of homes sold fell by a fifth to 1,104, with the average selling price jumping by nearly a quarter to £799,000. The gross profit margin fell to 32.3% from last year’s 36.1%, reflecting the mix of properties sold.

Berkeley shares fell by over 3% in UK trading, leaving the shares down around 10% year-to-date. Shares for fellow housebuilder Barratt Developments (LSE:BDEV) are down by a similar amount in 2020, while shares for smaller rivals Redrow (LSE:RDW) and Crest Nicholson (LSE:CRST) are down by around a quarter. 

Berkeley's management reminded investors of the uncertainties created by Covid-19 and tapering of government support, along with the still to be finalised terms of the UK’s trading relationship with the European Union. High-end London properties have regularly brought its properties to the attention of overseas buyers. 

However, the builder of large complex regeneration sites again reiterated its expectation for full-year profit in the region of £500 million, underpinned by a 4% increase in forward sales since late April and net cash of £954 million.

Investment in future product had continued with 2,800 plots acquired over 4 sites - 3 in London and 1 in Oxford - with work on 28 large long-term regeneration sites ongoing. A total of 11,000 people are currently working on its sites, up 10% from before the pandemic.

Berkeley also unveiled a new ten-year environmental policy. It is now to pursue new science-based targets committing it to reducing emissions from its own direct operations by 50% by 2030 and reducing the carbon intensity of its homes by 40% by 2030. 

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. Founder Tony Pidgley, who sadly died earlier this year, has arguably been the dominant force behind its revered status, regularly correctly calling the ups and downs of the property market. 

A strong presence in London has left Berkeley more subject to international buyer and property investor considerations. Recent second wave Covid lockdowns may also have disrupted business. But, historically, Berkeley has often created opportunity out of difficulties, buying land in the aftermath of the financial crisis for example. 

For investors, a fall in half-year profits and the clouded Covid and Brexit outlook should not be overlooked. The loss of the highly experienced Mr Pidgley also needs to be remembered. But investment in future product, continued shareholder returns and a clear willingness to adapt, given new climate change goals, all appear to underline group confidence in the long-term outlook. 

Positives: 

• An industry revered track record
• A commitment to shareholder returns

Negatives:

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

The average rating of stock market analysts:

Strong hold