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Berkeley - on track for guidance

Matt Britzman, Equity Analyst | 11 March 2022 | A A A
Berkeley - on track for guidance

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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 ORD GBP0.054141

Sell: 4,088.00 | Buy: 4,091.00 | Change -56.00 (-1.35%)
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Between 1 November 2021 to 28 February 2022, underlying sales reservations have remained slightly ahead of pre-pandemic levels. Higher house prices are more than offsetting the impact of rising costs, with cancelation rates at normal levels.

The group warned of ''continuing inflationary pressure and supply chain constraints'', despite which it remains on track to hit earnings guidance for the full year.

The shares rose 1.6% following the announcement.

View the latest Berkeley share price and how to deal

Our view

Berkeley looks to be a steady ship as sales continue to trend above pre-pandemic levels. Guidance, which was raised at the half year mark, remains intact.

The group's London focus, and higher-end product with an average sale price of £647,000 last we heard, means it offers something different to the other large builders. 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 going forwards depends on how the economy evolves.

The signs were positive back at the half year mark, with the group able to release more homes in its key London market as sentiment improved. The average selling price did fall, but remain above the group's business plan level and crucially high enough to offset increased building costs.

Underpinned by healthy free cash flow, net cash is expected to come in around £900m at the end of the year. That gives the group plenty of breathing room to stomach any ups and downs, but also, supports growth plans. It also adds weight to one of Berkeley's key attractions, its 6.1% prospective yield. Please remember no dividend is ever guaranteed.

The group's committed to redeploying cash for further land buying, with £226m set aside for new investment in the near term. This comes as welcome news, shareholder returns are great, but the group needs to keep investing in new projects to push growth on.

Longer term growth drivers for the sector remain intact in our view. Brits still love to own their own homes and all political parties see the need for more housebuilding in the UK. All the while, mortgages remain relatively affordable for now.

There are headwinds that could upset the apple cart. The cost of building materials is rising, creating a potential headwind for margins, should house price growth slow. Inflation more broadly could also trigger further rises in interest rates, which would increase the costs of mortgages and could hurt demand for new homes. Berkeley wouldn't necessarily escape the damage.

Overall, Berkeley offers a differentiated business model, and performance to date has been robust. If the economy continues to recover, Berkeley should benefit. But we can't rule out ups and downs in the medium term, as the interest rate environment and wider market face uncertainty.

Berkeley key facts

  • Price/Book ratio: 1.44
  • Ten year average Price/Book ratio: 1.88
  • Prospective dividend yield (next 12 months): 6.1%

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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Trading Statement

Forward sales, which represents cash due to be paid following the exchange of private sales, is expected to be above £1.7bn at the full-year mark.

Net cash is expected to be in the region of £900m, subject to the timing of land payments. If achieved, that'd be up from £846m at the half year mark.

Since the half year mark, the group's refinanced £750m worth of bank facilities, which was due to expire toward the end of 2023. The replacement facilities are worth £800m and expire in February 2027.

£141m is due to be returned to shareholders for the six months ending 30 September, £35m of which has already been returned via share buybacks. The second half of the previously identified surplus capital, totalling £226m, is expected to be spent on bringing sites in the near-term pipeline into development.

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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.


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