ii view: reasons for Berkeley Group to be optimistic

A slow return of travel for overseas buyers and an estimated future yield of over 5%. Buy, sell or hold?

Trading update for the first four months to 31 August

ii round-up:

London and Southeast-focused housebuilder Berkeley Group (LSE:BKG) today reaffirmed its profit guidance for the financial year to late April 2022 at its AGM. 

A continuation of the resilient market conditions reported at its full-year results in June, should see pre-tax profit for the current year at least matching last year’s £518 million. Reservations rates in the four-month period achieved pre-pandemic levels compared to the 20% fall seen this time last year. 

Berkeley shares were little changed in UK trading having gained by around 50% since pandemic induced market lows in March 2020. That’s below the 80%-plus gain seen for larger national builders Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV). 

Experts calculate a 25% gain in reservations year-over-year, aided by increased levels of demand in London and supported by the return of international buyers despite ongoing travel restrictions. 

On the downside, resilience in sales had contrasted with ongoing operational challenges. Selling prices above management’s expectation had helped offset rising build costs, with the board staying mindful of ongoing issues in the supply chain and labour markets given both Brexit and the pandemic.

Having started the financial year with net cash of £1.1 billion, the company continues to invest in land. Berkeley still anticipates that a large part of its previously announced £228 million surplus capital return due by March 2023 will be allocated to land expenditure. 

Subject to approval by shareholders at the AGM, the previously announced B-share capital return of £451 million will complete later this month. This will be accompanied by a share consolidation in order to keep the share price broadly stable. 

ii view:

Berkeley Group was established in 1976. Today its brands include Berkeley Homes, St Edward, St George, St James, St Joseph and St William. It operates principally in London, Birmingham and the South of England.

Sales are divided fairly evenly between owner-occupiers and investors, with many investors coming from overseas. As such, the pandemic has hit Berkeley in a way not seen at other housebuilders. Ongoing international travel restrictions had hindered its overseas buyers from visiting and viewing its properties. 

For share investors, pandemic uncertainties and considerations for its overseas buyers cannot yet be totally dismissed. The previous loss of its founder and guiding light, Tony Pidgley, who regularly called the ups and downs of the property market, should also not be forgotten. 

But Berkeley is the largest housebuilder in London, and offsite factory manufacturing is being developed to speed construction and overcome recruitment challenges. Shareholder returns also remain a core focus, with analysts currently estimating a future dividend yield of over 5%. In all, and while some caution remains sensible, a slow opening up of travel may now lure back long-term investors.

Positives: 

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

Negatives:

• Rising build costs
• Uncertain pandemic and economic outlook

The average rating of stock market analysts:

Strong hold