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Berkeley Group - Profit returns to 'normal'

Nicholas Hyett, Equity Analyst | 17 June 2020 | A A A
Berkeley Group - Profit returns to 'normal'

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Berkeley Group Holdings plc Ordinary Shares

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Berkeley's revenues fell 35.1% to £1.9bn in the year ended 30 April 2020 as a number of Central London developments completed. Full year profit before tax of £503.7m was down 35% for the same reason.

Sales in April and May were down around 50%, although pricing was ahead of expectations. The group says it's too early to say where demand will settle in the coming year.

The group remains committed to returning £280m to shareholders each year until 2025, and will determine how much of this is paid as a dividend in August. Berkeley is also deferring a £455m capital return for up to two years in the light of COVID-19 related disruption.

The shares rose 2.5% following the announcement.

View the latest Berkeley share price and how to deal

Our View

Like other housebuilders, the COVID-19 pandemic forced Berkeley to wind down its operations for a time. This is going to hit profits in the short term, but now society is starting to open up, the focus turns to economic recovery.

In the long run, we think the UK housing market is reasonably attractive. Brits still love to own their own homes, all political parties see the need for more housebuilding and mortgages are relatively affordable. However, the sector is cyclical and highly exposed to economic shocks, and COVID-19 may turn out to be a rather large one.

Berkeley does offer something different because it operates at the pricier end of the market and has a large exposure to London. Many of its sites are technically challenging, and that's afforded it enviable margins in the past. Whether or not this exposure to more exclusive property proves to be an advantage depends on the nature of our economic recovery.

Berkeley has also tended to run a tight ship through the economic cycle - it's enjoying high margins now partly because of its deft management of the financial crisis. The balance sheet is currently packed with over £1.1bn of net cash, and the group has a further £250m in available credit. Berkeley had planned to return the lion's share of this to investors, but this decision has been delayed for now, which we think is sensible given the uncertainty.

Unlike its peers however, Berkeley is going forward with its original dividend and share buyback plans. This demonstrates management's confidence in the future, but we're mindful that until there's a clearer picture of what the medium-term is going to look like, this could be seen by some as over-confidence. Remember dividends are never guaranteed, and that's especially true in difficult times like these.

Overall, Berkeley offers a differentiated business model, and performance to date has been robust. If the shutdown proves short lived, we think it's well positioned to bounce back. But "if" is doing a lot of work here - a prolonged shutdown or slow economic recovery will eventually whittle away Berkeley's capital.

For now, the shares change hands for 1.8 times book value, in line with the long term average. However, because the value of Berkeley's assets are tied to house prices, they risk getting written down if the economy fails to bounce back quickly.

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Full year results

Berkeley sold 2,723 homes during the year for an average price of £677,000, down from 3,698 homes at £748,000 last year. The fall in average selling price reflects the differing mix of properties.

The group's gross margin has risen from 31.3% to 33.2%, again reflecting the mix of properties. Together with higher staff costs that mean Berkeley's operating margin fell from 26.0% to 24.5%.

The group ended the year with £1.1bn in net cash, up 16.8% year-on-year, and the group has £250m left to draw upon in its revolving credit facility. The group's forward sales position is £1.9bn, compared with £1.8bn last year.

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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 for more information.