Berkeley full-year revenue rose 1% to £2.5bn. This comes as a 15% increase in completed house sales (4,047 homes) was broadly offset by an 11% decline in average selling prices (£593,000), reflecting a demand shift towards lower priced properties.
Pre-tax profit fell 5% to £529mn, broadly in line with expectations. The order book fell from £1.7bn to £1.4bn, and the company expects this to ‘moderate further’ next year.
Free cash flow was down 17% to £192mn. The group ended the year with net cash of £337mn, ahead of its previous guidance of around £300mn.
Full-year pre-tax profit guidance of around £450mn was slightly below market expectations of £470mn.
Long-time CEO Rob Perrins is set to step down and be replaced by current CFO Richard Stearn at the company’s AGM in September.
The shares were down 8.9% in early trading.
Our view
Berkeley’s full-year trading and profits were largely as expected. But markets chose to focus on the shrinking order book, and with further declines expected this year, the shares came under pressure on the day.
The group’s gearing up for the future, with a new CEO set to step in and spearhead its growth and transformation across its next 10-year plan. A change at the top always brings some uncertainty, but with the incoming name being the long-standing CFO, we think transition risk is limited.
Berkeley’s London focus and higher-end product, with an average sale price of nearly £600,000, means it offers something different from the other large builders. Many of its sites are technically challenging and offer a differentiated living experience to its customers.
Domestic and international demand in the key London area is likely to remain more robust than in other parts of the country, and the housing supply shortage doesn't look to be going away anytime soon. Build cost inflation has remained stable and alongside a tight grip on operational costs, margins are moving in the right direction.
Then there’s the group’s change-of-tack plans to build and rent 4,000 homes in London over ten years, which makes sense in theory. The rental market is hot, and the aim is to set up a mature portfolio of rented assets before looking to dispose of them.
The problem is it’s a slower route to getting the full cash proceeds than the usual strategy of selling on a forward basis. It’ll also eat into surplus cash in the medium term, so there’ll be less available for shareholder returns.
There are other challenges to be aware of too. While mortgage rates have dipped from peak levels, they remain elevated and continue to cause a relative lack of urgency among buyers. The picture’s improving but there’s still some way to go to get back to the boom of a few years ago.
£2.5bn has been allocated for land acquisitions over the next decade. That should be funded by free cash flow, reflecting confidence in the long-term housing market - a view we share given strong structural demand. But we’d like to see the order book return to growth in the near term, and the pivot to Buy-to-Rent presents cash flow risks worth monitoring.
With its higher-end, London focus, Berkeley offers something different to the broader sector. Its resilience in recent years has earned it a valuation at the high end of its peer group. But if the housing market picks back up in the medium term, we expect to see the valuations of other names in the sector recover more.
Environmental, social and governance (ESG) risk
Most housebuilders are relatively low risk in terms of ESG, particularly for those in Europe. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.
According to Sustainalytics, Berkeley Group’s management of ESG risk is strong.
The group has strong science-based greenhouse reduction targets and deadlines which are backed by policy commitment and ongoing measurement, monitoring and reporting. However, while the group considers recyclability of products when making purchases, it does not disclose the percentage of recycled materials used, or a target for recycled material use in the future.
Berkeley key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 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.