Optimistic Berkeley Group upgrades profit forecast
Investors are taking a more cautious approach to housebuilders generally, but Berkeley is in a good position when interest rates start to fall and the sector finally turns a corner. ii's head of markets runs through the annual results.
19th June 2024 08:21
by Richard Hunter from interactive investor
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Berkeley Group Holdings (The) (LSE:BKG)’s focus on the more upmarket end of the housing spectrum has proved to be something of a shield against what has been a difficult few years for housebuilders.
The group reports that enquiry levels are good, as customers begin to renew their interest in anticipation of falling interest rates later in the year, and with mortgage availability improving given an increasingly competitive range of offers. There will still be vestiges of weakness which will take some time to wash through, such as sales rates, which are down by a third compared to the previous year.
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At the same time, the group is differentiated from a number of its competitors on a couple of fronts. The first is the group’s exposure to London and the South East, where an average selling price of £664,000 compares to £608,000 the previous year, leaving scope for margin improvements and profit.
There is also more visibility in future earnings, with an order book of £1.7 billion, albeit lower than the previous £2.1 billion given generally higher political and macroeconomic volatility. Even so, 80% of sales for the new financial year have been secured, adding an extra layer of protection to its forecasts.
Pre-tax profit of £557 million for the year ended 30 April 2024 is 7.8% lower than the corresponding period, but in excess of the consensus of £550 million. A decline of 3.4% in revenues to £2.46 billion is in line with expectations, while the operating margin is also healthy at 19.5%, even having drifted slightly lower from 20.3%.
Net cash has improved significantly from £410 million to £532 million which, alongside the group’s lending facilities, gives access to liquidity of £1.7 billion, providing financial firepower. Indeed, Berkeley has stated that it is ready to invest in new opportunities once conditions for growth are re-established. In addition, with a tight grip on its own developments and with build cost inflation now having fallen to negligible levels, the group has seen some benefit from its strategy despite the clear challenges ahead.
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Of course, the return to the top of the cycle remains some way off as yet, with the sector having faced a multitude of challenges in the wider economy such as generally stubborn inflation, higher interest rates and understandably less buying interest.
The recently announced Competition and Markets Authority probe into potential price collusion was an unwelcome development which overhangs a number of housebuilders, including Berkeley, although the separate investigation into poor-build quality was shelved. The group has also previously added the planning and regulatory environment to this list, and being another reason why it is not currently investing in new developments.
The announcement of a “Build to Rent” platform shows some ambition and will be closely watched by investors. The platform aims to benefit from the strong demand for and chronic under-supply of high-quality rental homes in and around London, and the 10-year programme which initially covers 4,000 new homes is a bold statement of intent. The exercise will be a funded in a number of ways, but without jeopardising the group’s broader profile.
The propensity for shareholder returns is therefore not under threat for the moment, with the possibility of future share buybacks adding to an announced special dividend of £1.74 per share which takes the projected yield to over 5%.
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In terms of outlook, Berkeley has raised guidance for the forthcoming year, projecting a pre-tax profit of £525 million. In 2026 the cautious estimate of £450 million would nonetheless achieve the group’s previously stated objective of £1.5 billion over this three-year period. In the meantime, the apparently warm political views towards housebuilding regardless of the forthcoming election results should provide some support for the sector as a whole.
Berkeley has navigated the last few years carefully, although the full results of its labours are perhaps yet to fully wash through. The share price remains some 19% shy of the level just prior to the pandemic, although the more recent performance has reflected a slowly improving environment, whereby over the last year, the shares have added 27%, as compared to a gain of 8% for the wider FTSE 100.
The market consensus for the sector generally remains in relatively cautious mode which is likely to last until the corner has finally been turned, as interest rates and affordability begin a downward trajectory. As such, the general view remains that Berkeley is a 'hold' for the time being, even though its prospects are becoming increasingly evident.
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