Berkeley Group Holdings plc (BKG) ORD GBP0.054141
HL comment (8 December 2021)
Half-year revenue rose 36.3% to £1.2bn. Operating profits followed suit up 18.9% to £271m. Performance was driven by an increase in the number of homes sold, which is now beyond 2019 levels. However, average selling prices declined.
Management raised its earnings guidance for the current financial year by 5% and expects 5% annual profit growth for the next 3 years.
Half of the previously identified £455 surplus cash has been returned to shareholders, with remainder set to be used for land investment. The group remains committed to returning £282m per year to shareholders through September 2025.
Sales volumes beyond pre-pandemic levels meant Berkeley was able to raise guidance at the half-year mark. Return on equity of 19% for the half was well above the group's long term goal of 15% as well.
Berkeley's London focus and higher end product 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 how the economy fares as we move on from the pandemic.
The signs are positive The group was able to release more homes in its key London market as sentiment improved. The average selling price did fall, but it's still above the groups business plan level. Brits still love to own their own homes, all political parties see the need for more housebuilding and mortgages are relatively affordable.
The group has historically navigated economic turbulence well - 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 of £846, and a further £450m in available credit.
That safety net of cash supports the group's planned growth while also underpinning impressive shareholder returns. £486.4m was returned to shareholders in the first-half and the group's reaffirmed plans to return £282m per year up to September 2025. Shares also boast a 5.3% prospective dividend yield - although as ever no shareholder return is guaranteed.
The group's also committed to redeploying cash for further land buying, with £226m set aside for new investment. This comes as welcome news, shareholder returns are great, but the group needs to keep investing in new projects to push growth on.
There are headwinds that could upset the apple cart. The cost of building materials is rising, creating a potential headwind for margins when house price growth slows. Inflation more broadly could also trigger a rise in interest rates, which would likely be painful for house prices across the board. Berkeley wouldn't necessarily escape the damage.
Overall, though 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.
Berkeley key facts
- Price/Earnings ratio (next 12 months): 12.4
- 10-year Average Price/Earnings ratio: 10.2
- Prospective dividend yield (next 12 months): 5.3%
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.
Half Year Results
Berkeley sold 1,828 homes in the period, up 66% from last year and beyond pre-pandemic levels. The average selling price of £647,000 was down from £799,000 last year, reflecting the mix of properties sold. The group sold £21m of commercial property, up from £1.1m last year when no significant sales were made. Residential revenue was up 34% to £1.2m.
Forward sales were marginally lower at £1.7bn.
Operating margins decreased from 25.4% to 22.2%, reflecting a £14.3m increase in operating costs as employee incentive payments rose.
As at 31 October, the group's landbank stood at 63,302 plots, up from 63,270 at the end of April. 73% of the total landbank have implementable planning consent and are in construction.
Free cash flow for the period stood at £231m, an improvement from last year's outflow of £12.7m. Net cash fell £282m to £846m. Land creditor liabilities at the end of April stood at £367.5m, down from £388.2m last year. Of this, £47.3m is due in the short term.
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 disclosure for more information.
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