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Berkeley-sales and profits rise

Sophie Lund-Yates, Equity Analyst | 23 June 2021 | A A A
Berkeley-sales and profits rise

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Berkeley Group Holdings plc Ordinary Shares

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Full year revenue rose 14.7% to £2.2bn, and operating profits rose 6.9% to £502.3m, reflecting an increase in both the number of homes sold and average selling prices. However, both private sales reservations and forward sales declined.

The group's on track to deliver a 15% pre-tax return on equity, and annual pre-tax profits of roughly £500m, in the years 2019 - 2025.

This year the group bought back 4.4m shares worth £189m and paid £145.5m in dividends. This year the group plans to return £450m to shareholders through a share redemption. That includes the planned £280m return and £227m in additional surplus cash.

The shares fell 2.4% following the announcement.

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Our View

Strong pricing and efficient building meant Berkeley managed to deliver on its targets despite the pandemic. Return on equity for the year was 16.5%, comfortably above management's long-term goal for 15%.

But the explosion of pent-up demand we saw following lockdowns could be starting to taper. The latest housing data showed the rate at which people are buying new homes is starting to trail off.

Berkeley's results came with two red flags that seem to support that narrative. The first was a 20% decline in new reservations. While that could be a product of pandemic-related delays, it could also indicate pricing pressure or weakness in the high-end London market. The second was a slowdown in forward sales. Management confirmed that enquiries in London were currently above pre-pandemic levels, which offers some relief. But it's something to keep an eye on in future updates.

Instability in the housing market isn't a major concern yet, though. Brits still love to own their own homes, all political parties see the need for more housebuilding and mortgages are relatively affordable.

Plus, Berkeley offers 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 how the economy fares as we move on from the pandemic.

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. At last check, the balance sheet had net cash in excess of £1bn, and the group had a further £450m in available credit.

That safety net of cash supports the group's plans to up its shareholder returns this year. For now Berkeley looks more than capable of keeping up its dividend and buyback plans, but remember dividends are never guaranteed.

Overall, Berkeley offers a differentiated business model, and performance to date has been robust. If the economic recovery goes off without a hitch, the group is well positioned to thrive. But "if" is still doing a lot of work here - a uncertainty looms ahead and that could eventually whittle away Berkeley's capital.

Berkeley key facts

  • Price/Earnings ratio: 13.5
  • 10 year average Price/Earnings ratio: 10.3
  • Prospective dividend yield (next 12 months): 4.4%

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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Full Year Results

Berkeley sold 2,825 homes this year, up from 2,723. The average selling price was £770,000, a 13.7% increase, driven by a favourable mix of developments, particularly in London. Private sales reservations fell 20%, as expected, reflecting the decision to delay the launch of new developments during the pandemic. Forward sales, which reflects sales due to complete within the next three years, fell £146m to £1.7bn.

Commercial revenue fell to £1.9m from £36.7m as the group didn't make any significant sales during the year.

Despite a £34.7m reduction in operating costs, increased costs associated with the pandemic and group's long-term growth initiatives, meant operating margins declined by 1.7 percentage points to 22.8%.

The landbank stands at 63,270 plots with an estimated future gross profit of £6.9bn, up from last year's 58,413 worth £6.4bn. 71.6% of the sites have implementable planning consent and are in construction.

As at 30 April 2021, the group's inventory had risen by £97.6m to £3.7bn. This includes land not under development (£331.4m), work in progress (£3.2bn) and unsold homes (£105.4m).

Free cash flow rose from £299.8m to £322.6m, and the group finished the year with a net cash position of £1.1bn. Berkeley has a land creditor liabilities of £388.2m, compared to £372.7m last year. Of this, £57.3m is due in the short-term.

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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.