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Berkeley Group - on track to hit guidance

George Salmon | 15 March 2019 | A A A
Berkeley Group - on track to hit guidance

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Berkeley Group Holdings plc Ordinary Shares

Sell: 4,157.00 | Buy: 4,163.00 | Change 45.00 (1.09%)
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In a brief trading update, Berkeley reiterated the pre-tax profit guidance announced in December's half year results, for this and the following two years.

The shares were little moved in early trading.

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Our View

Strong trading saw Berkeley upgrade profit forecasts again in December. However, uncertainty around the Brexit process threatens to overshadow what's been a stellar couple of years.

Berkeley has consistently sought to reassure investors, and remains confident in the long-term attractions of its key markets. One of the biggest comforts is the group's landbank, it expects £6bn in gross profit from the existing hoard in the next few years.

Such a confident outlook is encouraging, but investors should remember a bird in hand is worth two in the bush - especially since activity levels in London are slowing, and a disorderly Brexit would likely impact the London property market further. While founder and Chairman Tony Pidgley remains confident in the group's prospects, Berkeley's short-term strategy contains a notable degree of caution.

Still, 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 financial crisis.

Long-term, Berkeley's unique expertise in developing sites others find too challenging has served it well in the past, and goes some way to explaining why the shares trade on a more lofty valuation than peers in the sector. They currently change hands for 2 times book value.

That premium rating is also tied to the group's asset base. Berkeley's significant forward sales and healthy net cash position will boost confidence in the capital returns plans. From 2011 to 2018, it returned £11.34 per share, and investors can expect around £2.16 per year per share to come back through a combination of dividends and share buy-backs by 2025, although of course there are no guarantees.

While we like Berkeley's operating model, and have faith in the management team, the bottom line is sentiment will likely remain closely tied to the Brexit barometer in the immediate future.

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Fourth Quarter Trading Update

Berkeley is "very mindful of the potential for short-term market dislocations from the current political back-drop". However, the group remains convinced in the long-term resilience of its markets - and so continues to invest in its next generation of sites.

The group expects to have £859.7m of net cash at the full year stage. That represents a 25% increase on 2017/18.

Berkeley currently plans to return £139.7m to shareholders every six months. A dividend of £9.2m was paid on 16 January 2019, which ensured the October-March returns were completed early. The turn of the next £139.7m, due over the six months to 30 September 2019, has been started with £5.2m of share buybacks already completed.

Full year results are expected in June.

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.

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