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Berkeley - higher sales continue to offset inflation

Berkeley - higher sales continue to offset inflation

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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: 3,834.00 | Buy: 3,838.00 | Change 76.00 (2.03%)
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Berkeley posted revenue of £2.3bn, up 6.6%, as the group sold 33% more homes. Higher operating costs and a lower average selling price, due to the type of property sold, meant operating margin declined 1.2 percentage points. However, driven by higher profit from joint ventures, pre-tax profit rose 6.4% to £551.5m.

Pre-tax profit is expected to come in at £600m next year, and £625m for the two years thereafter.

Berkeley continues to target £282m in shareholder returns per year, in either dividends or buybacks. £63.7m has been returned so far this year, with more information on the dividend coming on 11 August.

The group warned on volatility in the housing market, but sees prices continuing to offset cost inflation.

The shares were broadly flat following the announcement.

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Our view

Berkeley's full-year results showed that despite higher build costs, rising interest rates, and a cost-of-living crisis, buyers seem somewhat undeterred. Reservation rates remain ahead of pre-pandemic levels and forward sales pushed above and beyond expectations.

The group's London focus, and higher-end product with an average sale price of £603,000, 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 are positive. Domestic and international demand in the key London market remains robust and the housing supply shortage doesn't look to be going away anytime soon. The average selling price did fall, largely due to the type of homes sold, but remain above the group's business plan level and crucially high enough to offset increased building costs.

Following the purchase of National Grid's stake in St William, net cash took a hit but still stands at almost £270m. That gives 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 6.0% prospective yield. Please remember no dividend is ever guaranteed.

We were glad to see the group take quick action to boost its land assets with the St Williams purchase. Buying out a partner in a joint-venture that's already delivered 1,100 homes removes a lot of execution risk, and means earnings are should feel the benefit in the near term.

That'll likely be it now for any large scale land purchases, as the group turns focus to developing existing sites. There'll also be a shift in priority from land investment to shareholder returns once this round of spending's out the way, should there be excess capital to allow it.

There are immediate concerns though. The cost of building materials is rising, creating a headwind for margins. Inflation more broadly could also trigger further rises in interest rates, which would increase the costs of mortgages and put more pressure on buyers who are already seeing costs rise in other areas.

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, Berkeley sees affordability within historical levels for those with a deposit.

Overall, Berkeley offers a differentiated business model with an attractive target market. Longer term, we see Berkeley as well placed to capitalise on a fundamental shortage of homes in London and the Southeast. But we can't rule out ups and downs, as the interest rate environment and wider market face serious questions.

Berkeley key facts

  • Forward price/book ratio: 1.3
  • Ten year average price/book ratio: 1.7
  • Prospective dividend yield (next 12 months): 6.0%

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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Full Year Results

Berkeley sold 3,760 new homes (2021: 2,825) at an average selling price of £603,000, 22% lower than the prior year and reflecting the type of property sold. Underlying sales reservations are 25% higher than last year, and slightly ahead of pre-pandemic levels. Forward sales, which reflects sales due to complete within the next three years, rose 27% to £2.2bn.

The landbank rose from 63,270 plots to 66,163 plots and now has an estimated future gross profit of £8.3bn, up from £6.9bn.

As at 30 April 2022, the group's inventory totals £5.1bn. That reflects an increase of £1.5bn largely driven by the acquisition of St William. Inventories include £738m of land not under development and £4.4bn of work in progress and completed homes.

The group had a free cash outflow of £130.8m, driven by the acquisition of St William. Net cash at the end f the year stood at £268.9m, down from £1.1bn. This was driven by the free cash outflow, higher investment in joint ventures and increased shareholder returns. Land creditors rose from £388m to £801m, with £81m 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.