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Berkeley Group - profits down as planned

Nicholas Hyett | 6 December 2019 | A A A
Berkeley Group - profits down as planned

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Berkeley Group Holdings plc Ordinary Shares

Sell: 4,841.00 | Buy: 4,842.00 | Change 28.00 (0.58%)
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Berkeley delivered £276.7m of pre-tax profit during the first half, down by a little under a third on last year and in line with previous guidance.

The group has repurchased £124.6m worth of its shares and paid dividends of £25.2m in the period.

The shares were broadly flat following the announcement.

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Our View

Berkeley is a specialist housebuilder, with particular exposure to London and the South East. Despite Brexit uncertainties weighing on the region the group's impressed with a steady stream of positive results.

However, positive doesn't necessarily mean growing. Berkeley is moving on from several one-off, opportunistic developments in Central London that boosted revenues and profits. This is behind the recent 31% fall in pre-tax profits and means average selling prices are lower, although the group still operates at the high end of the market.

This is one of the group's unique selling points. It has a reputation for taking on difficult projects and producing more bespoke homes, which supports higher margins than most of its peers.

Berkeley has tended to run a tight ship through the cycle - it's enjoying high margins now partly because of its deft management of the financial crisis. The balance sheet is packed with over £1.1bn of cash, perhaps with memories of the crisis at the front of mind, which helps provide a layer of protection should the market turn once more.

All being well investors can expect around £2.23 per year per share to come back through a combination of dividends and share buy-backs each year until 2025, and the prospective yield is currently 4.4%.

As ever though, there are no guarantees and an economic downturn is a distinct possibility. A disorderly Brexit would be particularly bad news for London, and explains why Berkeley's short-term strategy contains a notable degree of caution. If the economy were to face a major wobble, expensive new homes are likely to be rubbed off shopping lists.

For now, the shares change hands for 1.8 times book value, slightly above the ten year average, and higher than most peers. That reflects investors' belief that Berkeley offers something a bit different to its competitors.

Overall, Berkeley offers a differentiated business model, and performance to date has been robust. Unfortunately that doesn't change the fact the political and economic climate could hinder short term performance. Like all house builders, Berkeley remains highly cyclical.

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Half year results

Group revenue fell 43.7% to £930.9m, reflecting a return to normality as the group moves on from several Central London developments acquired between 2009 and 2013. The group's average selling price also fell 13% to £644,000 on 1,389 new homes.

Berkeley achieved a gross margin of 36%, compared to 29% in the same period last year. A rise in profit from joint ventures meant pre-tax margins rose to 30% from 24%.

Berkeley holds £1.1bn of net cash, up from £975m, as the group has held back investment in an uncertain economic environment.

The forward sales pipeline has grown to £1.9bn, slightly ahead of £1.8bn last year. Berkeley thinks it has £6.3bn of future gross profits in its land holdings, which comprise 57,122 plots.

The group remains on target to deliver £3.3bn in pre -tax profit by April 2025, though any given year may range between £500m and £700m. Management expects to deliver a pre-tax return on equity of at least 15%, achieving 18.4% in the last six months.

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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 disclosure for more information.