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Berkeley Group - on track, but with notes of caution

George Salmon | 16 March 2018 | A A A
Berkeley Group - on track, but with notes of caution

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Berkeley Group Holdings plc Ordinary Shares

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An update covering the period 1 November to 28 February confirmed trading continues as anticipated, and that Berkeley Group remains confident of meeting longer-term profit guidance. However, the current environment doesn't support the step up in production its 'markets so badly need'.

The shares fell 5.5% on the morning of the release.

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Our View

The vote to leave the EU, combined with punitive buy to let stamp duty changes, gave the housing sector the jitters. However, much like other housebuilders, Berkeley has consistently moved to reassure investors. After what it described as a 'hiatus' around the referendum, reservations are recovering from post-referendum lows.

These are encouraging signs. However, there might be a few pages left in the Brexit chapter of the UK housing market story, and London could suffer more than most in any downturn.

For example, at the half year CEO Rob Perrins said "we are appropriately cautious in our investment strategy at present." That caution remains.

While this is clearly something for investors to be aware of, it's worth remembering that management have historically run a tight ship through the cycle. Part of the reason the group is now enjoying high margins is the way it managed the fallout from the last crisis. Long-term, Berkeley's expertise in developing sites others find too challenging should serve it well.

The group's significant forward sales and healthy balance sheet will boost confidence in the recently re-jigged capital returns plans too. Since 2011, the group has returned £9.34 per share, and we can expect another £7, or just shy of 20% of current market cap, by 2021- through a combination of dividends and share buy-backs. The prospective yield is 5%.

The shares trade on1.9 times forward book value, one of the more conservative ways of valuing housebuilders. That's above the long-term average of 1.7 times.

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Trading details

Berkeley says the fundamentals of the London and South East property market remain attractive, but flagged high transaction costs, the complexities of getting on-site after planning approval and prevailing economic uncertainty as headwinds.

These factors mean the group's cautious approach of acquiring land selectively will remain unchanged for the remainder of the year. With investment levels stable, continued cash generation will likely see net cash swell beyond the £632.8m reported at the half-year.

The policy of splitting investor returns between buybacks and cash dividends saw the group declare a dividend of 56.75p per share (£76.3m) with share buybacks totalling £62.9m. Berkeley plans on returning another £139.2m by 30 September 2018.

Looking ahead, Berkeley said it "expects forward sales above £2bn at 30 April 2018 and this resilient position, coupled with its well-located sites and strong balance sheet, enables the Board to reaffirm its guidance to deliver at least £3.3bn of pre-tax profits for the five year period from 1 May 2016."

Find out more about Berkeley Group shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.