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Berkeley Group - extra returns postponed

Emilie Stevens, Equity Analyst | 12 March 2020 | A A A
Berkeley Group - extra returns postponed

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Berkeley Group Holdings plc Ordinary Shares

Sell: 4,368.00 | Buy: 4,372.00 | Change 17.00 (0.39%)
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Berkeley says it hasn't noticed any impact from coronavirus on its business so far. However, because the eventual impact of the virus is unknown management has decided to postpone the recently announced extra shareholder returns.

The group confirmed it's on track to meet the markets expectations for the year.

The shares were down 6.5% following the announcement.

View the latest Berkeley share price and how to deal

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 currently packed with just over £1bn of cash, although the group plans to return the lion's share of this to investors over the next two years. We think postponing the first of these new payments is prudent given we don't know what the eventual coronavirus impact will be.

As ever, there are no guarantees and an economic downturn is a distinct possibility. A disorderly Brexit or significant coronavirus impact would be particularly bad news, 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, in line with the long term average, but higher than most peers. That reflects investors' belief that Berkeley offers something a bit different to its competitors, but also that the economic picture is uncertain.

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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Trading details

Berkeley confirmed it's on track for the current year, and reiterated its long term target to deliver £3.3bn in pre-tax profits in the six years to 30 April 2025.

In light of coronavirus developments, Berkeley announced changes to its enhanced dividend plans previously reported in January. The group plans to return £1bn to shareholders over the next two years, an increase of £455m over previous plans.

Instead of making two £500m payments over the next two years management is returning to its original plan of making a series of payments - starting with £125m on 31 March 2020 and another £140m by the end of September 2020.

The group will decide whether to continue with the enhanced returns in its full year results in June 2020, although it currently intends to do so.

Management confirmed that the group has over £1bn of cash on the balance sheet, and an extra £750m of bank facilities if needed.

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 disclosure for more information.