ii view: will Berkeley Group prosper in Andy Burnham era?

Full-year results to 30 April

• Revenue down 4.2% to £2.38 billion
• Pre-tax profit down 14.7% to £451.4 million
• Net cash of £363 million, up from £337 million a year ago
• Net Asset Value up 9% to £39.17 per share
• Shareholder returns of £233 million, down from returns of £381.5 million in the prior year

Guidance:

• Continues to expect cumulative profits for the next four years in excess of £1.4 billion

Executive Chairman Rob Perrins said:

“This robust performance, which is in line with guidance, reflects the focused execution of our Berkeley 2035 strategy, disciplined cost control and our agile response to extremely challenging macro-economic and regulatory conditions.

“In the current environment, our focus is on maximising long-term shareholder value by optimising our existing land holdings through re-planning to restore and enhance margins, rather than acquiring new sites; controlling operating costs; tightly sequencing construction in line with prevailing demand; and flexing the pace of Build-to-Rent (BTR) investment.”

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ii round-up:

Berkeley Group Holdings (The) (LSE:BKG) was founded in 1976, with the housebuilder today operating principally in London, Birmingham and the Southeast.

Group brands include Berkeley Homes, St Edward, St George, St James, St Joseph and St William.

As well as selling new homes, Berkeley now operates a Build to Rent (BTR) platform, with 4,000 of its builds over the next 10 years being kept by itself and rented to tenants.

For a round-up of these latest results announced on 24 June, please click here.

ii view:

A constituent of the FTSE 250 index, Berkeley highlights itself as the only large UK homebuilder focused on the regeneration and reviving of disused and underused land to build mixed-use neighbourhoods within undersupplied markets. Rivals include Persimmon (LSE:PSN), Taylor Wimpey (LSE:TW.) and Barratt Redrow (LSE:BTRW).

Berkeley’s 2035 strategy looks to offer high levels of financial flexibility, allocating free cashflow to 2035 between land investment, growing its BTR platform and continuing shareholder returns.

However, an earlier year adjustment to the strategy now takes a more conservative approach. The refreshed strategy includes a halt to buying new land, an increased targeting of cost savings, and a favouring of balance sheet strength over build volumes.

For investors, factors such as high interest rates due to inflation generated by war in the Middle East have seen Berkeley adopt a more cautious strategic approach over the medium term. Increased taxes and regulation now make buying new land less economic for Berkeley in terms of its required rate of return. Hoped for government reductions in planning hurdles have been slow and ineffective in being delivered, while Berkeley’s concentration in London and the Southeast leave earnings more exposed to restrictive rates, weak confidence and subdued transaction volumes in higher value markets.

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To the upside, management’s medium- to long-term approach gives Berkeley an ability to offer profit guidance over longer time frames than most rivals. A BTR platform offers income diversity not matched by rivals. Increased net cash and shareholder returns via only share buybacks leaves Berkeley buying shares in the marketplace at below a NAV of £39.17 per share, while a renewed push by the government and Andy Burnham to ease planning regulations would likely be beneficial for the housebuilding sector and Berkeley.

On balance, an enviable track record of navigating tough market conditions and a focus on shareholder returns via share buybacks offer continuing attraction. That said, more cautious investors may await a more stable economic and political outlook before taking an interest.

Positives:

• An industry revered track record
• Enjoys interest from overseas customers

Negatives:

• Highly uncertain economic outlook
• Planning reforms have failed in the past

The average rating of stock market analysts:

Hold