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Berkeley Group - margins fall, but shareholder returns intact

Nicholas Hyett, Equity Analyst | 4 December 2020 | A A A
Berkeley Group - margins fall, but shareholder returns intact

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Berkeley Group Holdings plc Ordinary Shares

Sell: 4,371.00 | Buy: 4,372.00 | Change 124.00 (2.92%)
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Berkeley Group reported first half revenues of £895.9m, down 3.8% year-on-year. That reflects the sale of 20.5% fewer homes, partially offset by a higher average selling price thanks to an increase in higher end home sales.

This change in sales mix also negatively affected gross profit margins, with the result that operating profits fell 11.1% to £228.0m, despite an improvement in operating costs. Earnings per share fell 15.2% to 149.6p.

Berkeley returned £171.4m to shareholders during the half through a combination of dividends and buybacks. It remains on track to return a total of £280m over the full year. The exact proportion to be returned as dividend will be announced later in the year.

The shares fell 3.8% in early trading.

View the latest Berkeley share price and how to deal

Our View

Strong pricing and efficient building means Berkeley's on course to meet full year guidance despite the disruption caused by the pandemic. In fact, the group is running slightly ahead of where it had expected to be by this point in the year.

During the first half, the group broke ground on five more sites, and four new acquisitions means it's added over twice as many homes to the pipeline as it's sold during the half. In the long run, management clearly think the London housing market remains attractive. Brits still love to own their own homes, all political parties see the need for more housebuilding and mortgages are relatively affordable.

Berkeley does offer something different to the other large builders 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.

The group 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. Despite recent investments the balance sheet still contains close to £1bn of net cash, and the group had a further £450m in available credit.

Unlike some of its peers, 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 prove to be 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 we can avoid further disruption, we think it's well positioned to bounce back. But "if" is still doing a lot of work here - a prolonged shutdown or slow economic recovery will eventually whittle away Berkeley's capital.

Berkeley key facts

  • Price/Book ratio: 1.97
  • 10 year average Price/Book ratio: 1.84
  • Prospective dividend yield (next 12 months): 4.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Berkeley sold 1,104 homes in the half, down from 1,389 in the same period last year. Average sales prices rose to £799,000 from £644,000.

Gross margin's declined from 36.1% a year ago to 32.3%, reflecting the change in mix. That was partially offset by a 23.4% decline in operating expenses to £61.2m, as long term incentive payouts declined.

During the year the group acquired 4 new sites, covering 2,800 homes, obtained two new planning consents (covering 2,650 homes) and started production at five sites. Berkeley finished the half with 60,327 plots in the pipeline (2019: 58,413). Forward sales rose 4.3% to £1.94bn.

The group reported a free cash outflow during the year of £12.7m. Together with £134.3m in dividends and £37.1m in share buybacks, led to a 16.2% decline in net cash, which finished the half at £954.3m.

Guidance remains unchanged, with the group targeting £500m of pre-tax profit this year and a 15% pre-tax return on equity over the six year to April 2025.

Find out more about Berkeley Group shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.