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Berkeley - sales down but outlook unchanged

Berkeley's sales since the end of September 2022 were around 25% lower than levels seen in the prior five months.

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Berkeley's sales since the end of September 2022 were around 25% lower than levels seen in the prior five months.

Controlling costs and maintaining operating margins remains a key focus, as the group says build cost inflation is showing early signs of moderating. Selling prices have remained firm and above Berkeley's targets.

The group is sticking to its guidance of full year pre-tax profits of around £600m, with net cash also expected to land at around £375m. Forward sales are expected to be above £2.0bn by the end of April, down from compared to £2.17bn at the same point last year.

Berkeley said it was taking a "cautious approach to releasing new phases" amid market volatility.

A dividend of 69.44p per share will be paid to shareholders later in March. Through a combination of share buybacks and dividends, the group plans to return a further £141.4m to shareholders by the end of September.

The shares were broadly flat following the announcement.

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Our view

Berkeley's reaffirmed its 2023 outlook despite the housing market sitting on shaky ground.

The group's experienced cancellation rates creeping up from the early-teens to around 20% this year. And while Berkeley remains confident in hitting its full-year pre-tax profit target of £600m, it did lower its targets for the following two years, with analysts expecting profit to fall in both years. Downgrades to expectations like this suggest that Berkeley envisions tough times ahead, as high building costs and increasing corporation tax will likely create a headwind for margins.

Rising interest rates, and a cost-of-living crisis, have been tough opponents to wrestle with, so it's no surprise to see Berkeley's sales rates since the end of September fall around 25%. But keep in mind that this drop-off hasn't been as significant as some of its peers.

Berkeley's ultimately putting in a relatively resilient showing.

The group's London focus, and higher-end product with an average sale price of £560,000, 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.

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. That's helped to keep sales prices firm over the last four months, and above the group's business plan level. There's early signs that build cost inflation is beginning to moderate too, which might provide some welcome relief to margins.

Following the purchase of National Grid's stake in St William Homes last year, net cash took a hit but is expected to recover to around £375m by the end of April. That should give some breathing room to stomach ups and downs. It also adds weight to one of Berkeley's key attractions, its 5.6% prospective yield. Please remember no dividend is ever guaranteed.

With its higher-end focus, Berkeley offers something different to the broader sector. For now, its customers are proving resilient as Berkeley's sales rates are holding up well. But conditions could certainly get worse before they get better. Some of that caution looks to be priced into the valuation, which sits below the long-term average.

Berkeley key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 10th March 2023